Ocera Therapeutics, Inc.
Ocera Therapeutics, Inc. (Form: 10-Q, Received: 11/14/2013 16:54:36)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549  
___________________________________________________________
 
FORM 10-Q
(Mark One) 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2013
 
or
 
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                to                
 
Commission File Number 001-35119
___________________________________________________________
  
Ocera Therapeutics, Inc.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
63-1192270
(State or other jurisdiction of incorporation
 
(I.R.S. Employer Identification No.)
or organization)
 
 
 
525 University Avenue, Suite 610
 
 
Palo Alto, CA
 
94301
(Address of principal executive offices)
 
(Zip Code)
 
(650) 475-0150
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  x   No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x  No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer o
 
Accelerated Filer o
 
 
 
Non-Accelerated Filer o
 
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨   No  x
 
The number of shares outstanding of the registrant’s Common Stock as of November 8, 2013 was 15,247,845 .                          

1




OCERA THERAPEUTICS, INC.
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2




PART I - FINANCIAL INFORMATION

Item 1. Unaudited Financial Statements

Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Amounts)
 
September 30,
December 31,
 
2013
2012
 
(unaudited)
 
Assets
 
 
Current assets:
 
 
Cash and cash equivalents
$
21,691

$
2,303

Accounts receivable
66


Investment credit receivable, current
310


Prepaid and other current assets
519

100

Current assets
22,586

2,403

Property and equipment, net
707

7

Investment credit receivable, net of current
275


Intangible assets, net
4,099


Goodwill
917


Total assets
$
28,584

$
2,410

Liabilities, convertible preferred stock and stockholders’ equity / (deficit)
 
 
Current liabilities:
 
 
Accounts payable
$
845

$
269

Accrued liabilities
2,096

280

Convertible notes payable, net—related parties

2,908

Total current liabilities
2,941

3,457

Other liabilities
5


Preferred stock warrant liability

16

Long-term liabilities
5
16
Total liabilities
2,946

3,473

Commitments and contingencies (Note 11)



Convertible preferred stock (Note 6)

61,743

Stockholders’ equity / (deficit):
 
 
Preferred Stock, $0.00001 par value; 5,000,000 shares authorized and no shares issued or outstanding at September 30, 2013 and no shares authorized, issued or outstanding at December 31, 2012, respectively.


Common stock, $0.00001 par value, 100,000,000 shares authorized at September 30, 2013 and 11,291,073 shares issued and outstanding at September 30, 2013 Common stock, $0.001 par value, 53,270,000 shares authorized at December 31, 2012 and 626,593 shares issued and outstanding at December 31, 2012

5

Additional paid-in capital
99,830

1,161

Accumulated other comprehensive income
2


Deficit accumulated during the development stage
(74,194)

(63,972)

Total stockholder's equity / (deficit)
25,638

(62,806)

Total liabilities, convertible preferred stock and stockholders’ equity / (deficit)
$
28,584

$
2,410

See accompanying notes.


3




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
(In Thousands, Except Share and Per Share Amounts)
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
Period from
December 20, 2004
(Inception) to
September 30, 2013
 
2013
2012
2013
2012
 
(unaudited)
(unaudited)
(unaudited)
Revenue
 
 
 
 
 
Licensing and other revenue
$
200

$

$
200

$

$
200

Total Revenue
200


200


200

Operating expenses:
 
 
 
 
 
Research and development
1,854

426

2,288

1,346

53,301

General and administrative
3,158

352

5,381

1,395

20,917

Amortization of intangibles
265


265


265

Restructuring charges
742


742


742

Impairment of intangibles
1,576


1,576


1,576

Total operating expenses
7,595

778

10,252

2,741

76,801

Other income (expense):
 
 
 
 
 
Interest and other income
1


1

1

3,753

Interest and other expense
(13
)
(44
)
(186
)
(87
)
(1,417
)
Change in fair value of warrant liability
3

2

15

(55
)
71

Total other income (expense), net
(9
)
(42
)
(170
)
(141
)
2,407

Net loss
$
(7,404
)
$
(820
)
$
(10,222
)
$
(2,882
)
$
(74,194
)
Net loss per share:
 
 
 
 
 
Net loss per share, basic and diluted
$
(0.77
)
$
(1.31
)
$
(2.78
)
$
(4.60
)
 
Weighted average number of shares used to compute net loss per share of common stock, basic and diluted
9,669,320

626,953

3,683,156

626,953

 
Other comprehensive loss:
 
 
 
 
 
Net loss
$
(7,404
)
$
(820
)
$
(10,222
)
$
(2,882
)
$
(74,194
)
Foreign currency translation adjustment
2


2


2

Comprehensive loss
$
(7,402
)
$
(820
)
$
(10,220
)
$
(2,882
)
$
(74,192
)
See accompanying notes.


4




Ocera Therapeutics, Inc.
(A Development Stage Company)
Consolidated Statements of Cash Flows
(In Thousands)
 
 
Nine Months
Ended
September 30,
Period From
December 20, 
2004
(Inception) to
September 30, 2013
 
 
2013
2012
 
 
(unaudited)
(unaudited)
Operating activities
 
 
 
 
Net loss
 
$
(10,222
)
$
(2,882
)
$
(74,194
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
Depreciation
 
56

16

433

Loss on disposal of fixed assets
 


8

Amortization of intangibles
 
265


265

Stock based compensation
 
234

128

1,115

Change in valuation of warrant liability
 
(15)

55

(72)

Impairment of intangible assets
 
1,576


1,576

(Amortization of discount) accretion of premium on investment securities
 

1

(342)

Debt discount, net and noncash interest expense
 
186

87

504

Changes in operating assets and liabilities:
 
 
 
 
Accounts receivable and investment tax credits
 
(19)


(19)

Prepaid expenses and other assets
 
(280)

(5)

(360)

Accounts payable
 
(453)

(699)

(184)

Accrued liabilities
 
605

(20)

782

Net cash used in operating activities
 
(8,067)

(3,319)

(70,488)

Investing activities
 
 
 
 
Purchases of property and equipment
 
(6)

(2)

(398)

Purchase of short-term investments
 


(142,044)

Sale and maturities of short-term investments
 

250

142,386

Cash received from merger transaction
 
7,465


7,465

Net cash provided by investing activities
 
7,459

248

7,409

Financing activities
 
 
 
 
Proceeds from sale of convertible preferred stock
 


60,744

Proceeds from the sale of common stock, net
 
19,973


19,973

Proceeds from issuance of convertible notes payable, net
 

1,513

2,940

Proceeds from note payable
 


4,000

Repayments of note payable
 


(4,000)

Proceeds from issuance of promissory note
 


1,000

Proceeds from issuance of common stock
 
23


113

Net cash provided by financing activities
 
19,996

1,513

84,770

Net increase (decrease) in cash and cash equivalents
 
19,388

(1,558)

21,691

Cash and cash equivalents—beginning of period
 
2,303

3,114


Cash and cash equivalents—end of period
 
$
21,691

$
1,556

$
21,691

Supplemental schedule of noncash investing and financing activities
 
 
 
 
Warrants issued in connection with notes payable
 
$

$
32

$
143

Reclassification of warrant liability to additional paid-in-capital
 
$
1

$
93

$
94

Issuance of options related to consulting agreement
 
$

$
7

$
13

Cash paid for interest
 
$

$

$
861

Conversion of convertible promissory note and interest to common stock
 
$
3,187

$

$
4,233

Conversion of convertible preferred stock to common stock
 
$
61,743

$

$
61,743

Common stock issued in connection with merger transaction
 
$
13,524

$

$
13,524

See accompanying notes.

5


Ocera Therapeutics, Inc.
(A Development Stage Company)

Notes to Financial Statements


Notes to Consolidated Financial Statements
(Information as of September 30, 2013 and thereafter for the three and nine months ended September 30, 2013 and 2012 and the period from December 20, 2004 (inception) to September 30, 2013 is unaudited)
1. The Company
Ocera Therapeutics, Inc. (the "Company") is a clinical stage biopharmaceutical company focused on the development and commercialization of OCR-002 (ornithine phenylacetate). OCR-002 is an ammonia scavenger which has been granted Orphan Disease and Fast Track status from the FDA to treat hyperammonemia and associated hepatic encephalopathy in patients with liver cirrhosis, acute liver failure and acute liver injury.

As of December 31, 2012 and September 30, 2013, the Company has devoted substantially all of its efforts to product development, raising capital and building infrastructure, and has not realized significant revenues. Accordingly, the Company is considered to be in the development stage.

On July 15, 2013, Terrapin Acquisition, Inc., a Delaware corporation (“Merger Sub”), a wholly owned subsidiary of Tranzyme, Inc., a Delaware corporation (“Tranzyme”), completed its merger (the “Merger”) with and into Ocera Therapeutics, Inc., a private Delaware corporation (“Private Ocera”). Private Ocera is considered the acquiring company for accounting purposes as upon completion of the Merger, Private Ocera's former stockholders held a majority of the voting interest of the combined company. In addition, six of the nine members of the board of directors of the combined company are former members of the Private Ocera board of directors. Therefore, the former members of the Private Ocera board of directors possess majority control of the board of directors of the combined company. The Merger was effected pursuant to an Agreement and Plan of Merger and Reorganization (the “Merger Agreement”), dated as of April 23, 2013, by and among Tranzyme, Private Ocera and Merger Sub. In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc. and the name of Private Ocera was changed to Ocera Subsidiary, Inc.
Pursuant to the Merger, Private Ocera’s convertible notes payable plus accrued interest were converted to Series C convertible preferred stock at a rate of $2.04858 per share and immediately thereafter, Private Ocera’s Series A, Series B and Series C convertible preferred stock were converted into Private Ocera common stock on a share for share basis and all such Private Ocera common stock was exchanged for Tranzyme common stock at a rate of one Private Ocera share for 0.11969414 Tranzyme shares (the "Exchange Ratio"). All share and per share amounts for all periods presented in these consolidated financial statements have been adjusted retroactively to reflect the exchange for Tranzyme shares. In addition, convertible preferred stock warrants of Private Ocera were converted into common stock warrants of Tranzyme, pursuant to the Merger, based upon the Exchange Ratio.

The Company's business is subject to significant risks consistent with biopharmaceutical companies seeking to develop technologies and product candidates for human therapeutic use. These risks include, but are not limited to, uncertainties regarding research and development, access to capital, obtaining and enforcing patents, receiving regulatory approval and competition with other biotechnology and pharmaceutical companies.
As of September 30, 2013, the Company has incurred losses since inception of $ 74.2 million . The Company expects to continue to incur losses and requires additional financial resources to advance its products to either commercial stage or liquidity events.

Basis of Presentation
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial reporting and the instructions to Form 10-Q and do not include all of the information and footnotes required for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results for the interim periods have been included. Operating results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results for the year ending December 31, 2013 or future periods. The accompanying financial statements should be read in conjunction with the Company’s audited financial statements and related notes included in Exhibit 99.2 to the Company's Current Report on Form 8-K/A filed on September 27, 2013 and available on the website of the United States Securities and Exchange Commission (www.sec.gov). The accompanying balance sheet as of December 31, 2012 has been derived from the audited balance sheet as of that date included in the Form 8-K/A.

6






2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of Ocera Therapeutics, Inc, and its subsidiaries, Ocera Subsidiary, Inc. and Tranzyme Pharma Inc. ("Tranzyme Pharma"). All significant intercompany balances and transactions have been eliminated. All amounts included in these notes to consolidated financial statements are reported in U.S. dollars, unless otherwise indicated.
Unaudited Interim Financial Information
The accompanying interim balance sheet as of September 30, 2013 and the statements of operations and comprehensive loss for the three and nine months ended September 30, 2013 and 2012 and the period from December 20, 2004 (inception) to September 30, 2013, and the statements of cash flows for the nine months ended September 30, 2013 and 2012 and period from December 20, 2004 (inception) to September 30, 2013, and the related footnote disclosures are unaudited. These unaudited interim financial statements have been prepared in accordance with GAAP. In management’s opinion, the unaudited interim financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, which include normal recurring adjustments, necessary for the fair presentation of the Company’s financial position as of September 30, 2013 and its results of operations and comprehensive loss for the three and nine months ended September 30, 2013 and 2012 and the period from December 20, 2004 (inception) to September 30, 2013, and its cash flows for the nine months ended June 30, 2013 and 2012 and the period from December 20, 2004 (inception) to September 30, 2013. The results for the nine months ended September 30, 2013 are not necessarily indicative of the results expected for the full fiscal year or any other interim period.
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker in making decisions regarding resource allocation and assessing performance. The Company views its operations and manages its business in one operating segment operating in the United States and Canada.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates fair value. The Company considers all highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents include money market funds and various deposit accounts.
Investment Tax Credits Receivable
The Company participates in government assistance programs in Quebec, Canada that provide refundable investment tax credits for certain research and development expenditures. The receivable represents management’s estimate of amounts expected to be recovered and is subject to adjustment based upon audit by Canadian taxation authorities. The Company reported investment tax credits receivable of $585,000 as of September 30, 2013.
Business Combinations
The Company accounted for the merger with Tranzyme as a reverse merger under the acquisition method of accounting. The consideration paid to acquire Tranzyme was measured at fair value and included the exchange of our common stock and assumption of vested stock options. This allocation of the purchase price resulted in recognition of intangible assets related to customer relationships and developed technology and goodwill. The allocation of purchase price requires the Company to make significant estimates and assumptions. The key assumptions in determining the fair value of intangible assets were the discount rate and the probability assigned to the milestone or royalty being achieved. Changes in the fair value may result

7




from either the passage of time or events occurring after the acquisition date, such as changes in the estimate of the probability of achieving the milestone or royalty.
Intangible Assets and Goodwill
The Company recorded intangible assets and goodwill upon the acquisition of Tranzyme on July 15, 2013. Acquired intangible assets are amortized on a straight-line basis over the remaining estimated economic life of 2.5 to 5 years. The Company reviews its intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparing its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value.
The Company performs an annual qualitative assessment of its goodwill to determine if any events or circumstances exist, such as an adverse change in business climate or adverse developmental or regulatory results of OCR-002, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. The determination of fair value requires significant judgment and estimates. For the purpose of impairment testing, the Company has determined that it has one reporting unit. There has been no impairment of goodwill for any periods presented.
Foreign Currency Translation
The Company's consolidated financial statements are presented in U.S. dollars. The financial statements of Tranzyme Pharma are re-measured from the local currency to U.S. dollars, as follows: monetary assets and liabilities are translated at the exchange rate in effect at the balance sheet date and non-monetary items at exchange rates in effect when the assets were acquired or non-monetary liabilities incurred. Revenue and expenses are translated at the average exchange rates prevailing during the period of the transaction. The gains and losses resulting from the translation of foreign currency financial statements into U.S. dollars are reported in accumulated other comprehensive income (loss).
Revenue Recognition
The Company recognizes revenue when it is realized or realizable and earned. Revenue is realized or realizable and earned when all of the following criteria are met: (a) persuasive evidence of an arrangement exists; (b) delivery has occurred or services have been rendered; (c) the Company’s price to the buyer is fixed or determinable; and (d) collectability is reasonably assured.
Research and Development Expenses
Research and development costs are expensed as incurred and primarily consist of license fees, salaries and related employee benefits, costs associated with clinical trials, manufacturing control, quality assurance, medical affairs and regulatory activities. The Company uses external service providers and vendors to conduct clinical trials and to provide various other research and development and manufacturing related products and services.
Preferred Stock Warrant Liability
Certain warrants to purchase the Company’s capital stock have historically been classified as liabilities and are recorded at estimated fair value. At each reporting period, any change in fair value of the freestanding warrants is recorded as other (expense) income. As a result of the Merger, the fair value of the preferred stock warrant liability was reclassified to additional paid in capital upon the conversion of warrants to purchase preferred stock into warrants to purchase common stock.

Stock Based Compensation
Share-based awards, including stock options, are recorded at their fair value as of the grant date and recognized to expense on a straight-line basis over the employee’s requisite service period, which is generally the vesting period of the award. Share-based compensation expense is based on awards ultimately expected to vest, and therefore the recorded expense includes an estimate of future forfeitures. Forfeitures are to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The measurement of nonemployee share-

8




based compensation is subject to periodic adjustments as the underlying equity instruments vest and is recognized as an expense over the period over which services are received. The Company estimates the fair value of share-based awards to employees, directors and non-employees using the Black-Scholes option-valuation model. The Black-Scholes model requires the input of subjective assumptions, including volatility, the expected term and the fair value of the underlying common stock on the date of grant, among other inputs.
Prior to the Merger the company granted stock options to purchase common stock to employees with exercise prices equal to the value of the underlying stock, as determined by the board of directors on the date the equity award was granted. The board of directors determined the fair value of the underlying common stock by considering a number of factors, including historical and projected financial results, the risks the Company faced at the time, the preferences of the Company’s preferred stockholders and the lack of liquidity of the Company’s common stock.

Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes . Under ASC 740, deferred tax assets and liabilities reflect the future tax consequences of the differences between the financial reporting and tax basis of assets and liabilities using current enacted tax rates. The Company provides a valuation allowance against net deferred tax assets unless, based upon the available evidence, it is more likely than not that the deferred tax assets will be realized.
The Company’s policy related to accounting for uncertainty in income taxes prescribes a recognition threshold and measurement attributed criteria for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss by the weighted average number of common shares and common share equivalents outstanding for the period. Common stock equivalents are only included when their effect is dilutive. The Company’s potentially dilutive securities which include convertible preferred stock, warrants, convertible notes payable and outstanding stock options under the stock option plan have been excluded from the computation of diluted net loss per share as they would be anti-dilutive. For all periods presented, there is no difference in the number of shares used to compute basic and diluted shares outstanding due to the Company’s net loss position. All share and per share amounts for all periods presented in the following table have been adjusted retroactively to reflect the exchange for Tranzyme, Inc shares as of the date of the Merger.
The following table presents the computation of net loss per share (in thousands, except share and per share data):
 
Three Months
Ended September 30,
Nine Months
Ended September 30,
 
2013
2012
2013
2012
 
(unaudited)
(unaudited)
Numerator
 
 
 
 
Net loss
$
(7,404
)
$
(820
)
$
(10,222
)
$
(2,882
)
Denominator
 
 
 
 
Weighted average common shares outstanding used to compute net loss per share, basic and diluted
9,669,320

626,953

3,683,156

626,953

Net loss per share, basic and diluted
$
(0.77
)
$
(1.31
)
$
(2.78
)
$
(4.60
)
Potentially dilutive securities are not included in the calculation of dilutive net loss per share because to do so would be anti-dilutive are as follows (in common equivalent shares on a weighted-average basis):

9




 
Three Months ended
September 30,
Nine Months ended
September 30,
 
2013
2012
2013
2012
 
(unaudited)
(unaudited)
Convertible preferred stock
736,570

4,840,324
3,472,405

4,840,324
Convertible preferred stock warrants
2,003

26,332
14,902

26,332
Common stock warrants
158,939

65,731
140,722

31,011
Common stock options
633,163

706,497
573,789

665,719
Total
1,530,675

5,638,884
4,201,818

5,563,386

In addition to the potentially dilutive securities noted above, the Company had outstanding convertible notes payable and accrued interest that were converted into 186,217 shares of common stock upon completion of the Merger. The Company has excluded these convertible notes payable from the table above.
Recent Accounting Pronouncements
Occasionally, new accounting standards are issued or proposed by the Financial Accounting Standards Board (the
"FASB"), or other standards-setting bodies that Ocera adopts by the effective date specified within the standard. Unless
otherwise discussed, standards that do not require adoption until a future date are not expected to have a material impact on
Ocera financial statements upon adoption.

In February 2013, the FASB issued a final rule related to the reporting of amounts reclassified out of accumulated
other comprehensive income that requires entities to report, either on their income statement or in a footnote to their financial statements, the effects on earnings from items that are reclassified out of other comprehensive income. The new accounting rules was effective for Ocera in the first quarter of 2013. The adoption of the new accounting rules did not have a material effect on Ocera's financial condition, results of operations or cash flows. Ocera chose to present the total of comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement of operations and comprehensive income.

In July 2013, the FASB issued Accounting Standards Update, or ASU, No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists . ASU 2013-11 provides explicit guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance is effective prospectively for fiscal years, and interim periods within those years, beginning after December 15, 2013, with an option for early adoption. The Company intends to adopt this guidance at the beginning of our first quarter of fiscal year 2014, and does not expect the adoption of this standard will have a material impact on the Company’s financial statements.

3. Fair Value Measurements
The following tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2013, and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine such fair value. As a basis for categorizing inputs, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used to measure fair value from market based assumptions to entity specific assumptions:
Level 1: Observable inputs such as quoted prices in active markets;
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The Company’s Level 3 financial liabilities consist of warrant liabilities related to warrants to purchase preferred stock. On July 15, 2013, warrants to purchase convertible preferred stock were converted to warrants to purchase common stock eliminating the terms that caused the preferred stock warrants to be accounted for as a liability.

10




Assets and liabilities measured at fair value on a recurring basis as of September 30, 2013 are as follows (in thousands):
 
Balance as of
September 30,
2013
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
Money market funds
$
18,437

$
18,437

$

$

Total assets
$
18,437

$
18,437

$

$


Assets and liabilities measured at fair value on a recurring basis as of December 31, 2012 are as follows (in thousands):
 
Balance as of
December 31,
2012
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
Money market funds
$
1,437

$
1,437

$

$

Total assets
$
1,437

$
1,437

$

$

Liabilities
 
 
 
 
Preferred stock warrant liability (1)
$
16

$

$

$
16

Total liabilities
$
16

$

$

$
16


(1)     The Company estimated fair value of its preferred stock warrant liability at issuance and adjusts the carrying value
each reporting period utilizing the model based on the following significant unobservable inputs: risk-free rate of 0.08% and 0.13% ; the expected dividend rates of 0% ; the remaining expected life of the warrants 0.3 and 0.8 years; the expected volatility of 79% and 91% of the fair value of the underlying preferred stock. The estimates are based on subjective assumptions that could differ in the future.
The following table provides the change in the fair value of Level 3 liabilities for the nine months ended September 30, 2013 (in thousands):
 
Convertible
Preferred Stock
Warrant Liability
Balance at December 31, 2012
$
(16
)
Change in fair value of warrant liability (unaudited)
(15
)
Conversion of preferred stock warrants into common stock warrants (unaudited)
(1
)
Balance at September 30, 2013 (unaudited)
$


4. Convertible Notes Payable
In March 2012, the Company entered into a convertible note and warrant purchase agreement with existing investors. The Company issued an aggregate principal amount of $1.5 million of convertible notes in an initial closing in March 2012 (the "March 2012 Notes"). The March 2012 Notes had an interest rate of 6% per annum and have a maturity date of the earlier of (i) March 30, 2013, (ii) a change of control, or (iii) an event of default. The notes could not be prepaid without the prior written consent of the holders of at least 67% of the principal amount outstanding under all notes issued.
In connection with the March 2012 Notes, the lenders received warrants for the purchase of the Company’s common stock equal to (i)  30% of the principal amount of the lender’s note divided by the lower of the price of the Series C convertible preferred stock or the equity security sold in a qualified or nonqualified financing had the Company entered into

11




certain strategic transactions, referred to as the "Special Condition", by June 2012 or (ii)  75% of the principal amount of the lender’s note divided by the lower of the Series C convertible preferred stock or the equity sold in a qualified or nonqualified financing if the Special Condition was not met. Accordingly, the lenders received warrants to purchase an aggregate of 26,292 shares of the Company’s common stock on March 30, 2012. Upon the expiration of the anti-dilution protection of the March 2012 notes payable on June 30, 2012, the Company issued an additional 39,439 common stock warrants. The March warrants have a seven year term expiring on March 30, 2019.
In October 2012, the Company issued an aggregate amount of $1.5 million of convertible notes in a second closing with existing investors (the "October 2012 Notes"). The October 2012 Notes had an interest rate of 6% per annum and had a maturity date of the earlier of (i) October 1, 2013, (ii) a change of control, or (iii) an event of default. The notes converted under the same terms as the March 2012 Notes but were based on the October 1, 2013, maturity date. The notes could not be prepaid without the prior written consent of the holders of at least 67% of the principal amount outstanding under all notes issued. In connection with the October 2012 Notes, the lenders received warrants to purchase 65,731 shares of the Company’s common stock. The October Notes had a seven -year term set to expire on October 1, 2019.
The common warrants issued in connection with the March 2012 Notes and October 2012 Notes are immediately exercisable at $ 0.67 per share.
In March 2013, the Company amended the March 2012 Notes to extend the maturity date to October 1, 2013. In April 2013, the March and October 2012 Notes were amended to change the note conversion date to automatically convert the unpaid principal and interest at the time of the Merger into shares of the Series C Preferred Stock of Private Ocera at the Series C Conversion Price of $2.04858 per share. There was no consideration paid, given or committed to the note holders by the Company in exchange for the modifications. The debt modification was evaluated under ASC  470-60, Trouble Debt Restructuring and under ASC 470-55, Debt Modification and Extinguishments. The Company determined that it was appropriate to account for the term extension and change to the conversion date on a prospective basis and the carrying amount of the debt remained unchanged. All costs incurred with third parties directly related to the maturity extension were expensed as incurred. There were no costs associated with the change to the note conversion date.

On July 15, 2013, the March and October 2012 Notes plus accrued interest of $ 187,000 were converted into 186,217 shares of common stock in connection with the Merger.

The Company recorded an aggregate of $ 184,000 and $186,000 of non-cash interest expense and amortization of debt discount related to the convertible notes payable for the year ended December 31, 2012 and the nine months ended September 30, 2013.
Warrants
Convertible Preferred Stock Warrants
In March 2006, the Company entered into a $4.0 million loan and security agreement with a lender to provide capital to the Company. The loan balance was fully repaid in November 2009. As consideration for the loan and security agreement, the lender received warrants to purchase 26,332 shares of Series A preferred stock of Private Ocera at $8.35 per share. The warrants are immediately exercisable with seven -year terms expiring on April 24, 2013 and November 1, 2013. On April 24, 2013, warrants for the purchase of 13,166 shares of Series A preferred stock of Private Ocera expired. On July 15, 2013, warrants for the purchase of 13,166 shares of Series A preferred stock were converted into warrants to purchase common stock of the Company in connection with the Merger.
Common Stock Warrants
The fair value of the March 2012 common stock warrants was determined to be $32,000 upon issuance. The fair value was recorded as a debt discount and amortized to interest expense using the effective interest method over the term of the March 2012 Notes.
The Company concluded that the March 2012 warrants were a derivative instrument as a result of anti-dilution protection included within the instrument. The March 2012 warrants were required to be recorded at fair value upon issuance and re-measured at each reporting period. The fair value of the warrant liability in the amount of $61,000 was recorded in the statement of operations and comprehensive loss. Upon the expiration of the anti-dilution protection in June 2012, the Company reclassified the fair value of $93,000 to additional paid-in capital.

12




The relative fair value of the October 2012 common stock warrants as of the date of issuance was determined to be $111,000 , which was recorded as a debt discount and amortized to interest expense using the effective interest method over the term of the October 2012 Notes.
The Company accounts for the October 2012 common stock warrants based on their relative fair value as compared to the convertible notes payable and recorded them as equity on the date of issuance. Because the October 2012 common stock warrants meet the requirements for equity classification, the Company is not required to re-measure the fair value of the warrants subsequent to the date of issuance.
On July 15, 2013, warrants to purchase 19,243 shares of common stock of Tranzyme became warrants to purchase common stock of the Company in connection with the merger.
The following table summarizes the outstanding common stock warrants and the corresponding exercise price as of September 30, 2013:
 
Number of Shares
Outstanding at
Per-Share
Exercise
 
Issuance Date
September 30, 2013
Price
Expiration
11/1/2006
13,166
$
8.35

11/1/2013
12/3/2008
2,380
84.00

12/3/2015
9/30/2010
3,240
160.44

4/6/2015
1/31/2012
13,623
44.04

1/31/2022
3/30/2012
26,292
0.67

3/30/2019
6/30/2012
39,439
0.67

6/30/2019
10/1/2012
65,731
0.67

10/1/2019
Total
163,871
 
 

On November 1, 2013, the Company had 13,166 commons stock warrants expire.
5. License Agreements and Acquired Development and Commercialization Rights
Kuereha Corporation
In July 2004, the Company in-licensed from Kureha Corporation ("Kureha") the technology and exclusive development and commercialization rights to its AST-120 product candidate for the treatment of liver and gastrointestinal disease for the territories of North America and Europe. The Company paid a $1.5 million up-front fee to Kureha. In March 2008, the Company amended the license agreement, in exchange for a payment of $0.5 million . Kureha will receive a fixed percentage of any payment that the Company may receive for sublicensed rights in the countries associated with the expanded territory. Under these agreements, the Company may also be required to make future milestone payments upon the achievement of various milestones related to regulatory or commercial events for its first indications in gastrointestinal diseases. The Company may also be obligated to pay a royalty in the low to high single digits on net sales. In April 2012, the Company amended the license agreement to include the development and commercialization of AST-120 as a medical device for IBS in European countries. Under this amended agreement, the Company may be required to make milestone payments based on future commercial milestones and net sales.
UCL Business PLC
In December 2008, the Company entered into a license agreement with University College of London Business PLC for worldwide rights to develop and commercialize OCR-002 and related technologies for any use. The agreement was amended on July 2011 and February 2013. As consideration for the license, the Company paid a $1.0 million up-front fee and may be required to make future milestone payments totaling up to $17.0 million upon the achievement of various milestones related to regulatory or commercial events. The Company may be obligated to pay a royalty in the low to mid-single digits based on the net sales of OCR-002.
Open Biosystems, Inc.


13




In October 2005, Tranzyme entered into a license and marketing agreement whereby Open Biosystems, Inc. acquired a worldwide royalty-bearing license to certain intellectual property unrelated to Tranzyme's lead product candidates prior to the Merger and Macrocyclic Template Chemistry (MATCH) drug discovery technology, as specified in the agreement. The Company earns royalties on annual net sales at rates that vary by licensed product category as defined in the agreement through 2017 or until the expiration date of the last-to-expire licensed patent or twelve years, whichever occurs last. Royalty revenue recognized from the licensing agreement was $33,000 for the three and nine month period ended September 30, 2013.
Bristol-Myers Squibb Company
    
In December 2009, Tranzyme entered into a two -year collaboration agreement with Bristol-Myers Squibb Company ("BMS") to discover, develop and commercialize novel macrocyclic compounds, other than Tranzyme's product candidates and internal programs, directed against a limited number of targets of interest to BMS.

On January 4, 2013, Tranzyme announced the successful completion of its chemistry-based drug discovery
collaboration with BMS. As a result of the joint research efforts, the Company transferred compounds to BMS for further development across multiple drug targets. Under the terms of the agreement, BMS is solely responsible for preclinical and clinical development of all products arising from the collaboration and for their commercialization globally. In connection with the agreement, the Company may receive up to approximately $80.0 million in additional development milestone payments, and $30.0 million in sales milestone payments, for each target program if development and regulatory milestones, or commercial milestones, respectively, are achieved. In addition, the Company would receive graduated single-digit percentage royalties and sales milestone payments on annual net sales of commercial products.

During the third quarter review of the Bristol-Myers Squibb (BMS) collaboration agreement, the Company determined that BMS will terminate its efforts on the development of one of two macrocyclic compounds under development pursuant to the Company's on-going collaboration agreement.
Material Transfer Agreements

During the three and nine month periods ended September 30, 2013, the Company billed approximately $167,000 of nonrefundable payments upon transfer of material to the third parties based upon agreements previously entered into by Tranzyme prior to the Merger. Neither the Company nor the third parties have any obligation beyond the delivery of materials and payment, therefore all the revenue was recognized upon completion of the material transfers during the three and nine month periods ended September 30, 2013.

6. Stockholders’ Deficit
Convertible Preferred Stock
Pursuant to the merger, Private Ocera’s convertible notes payable plus accrued interest were converted to Series C convertible preferred stock at a rate of $2.04858 per share and immediately thereafter, Private Ocera’s Series A, Series B and Series C convertible preferred stock was converted to common stock on a share for share basis and all resultant Private Ocera common stock was exchanged for Tranzyme common stock at a rate of one Private Ocera share for 0.11969414 Tranzyme, Inc. shares.
The following summarizes our preferred stock balances at September 30, 2013 and December 31, 2012 (in thousands except share and per share amounts):

14




 
September 30,

December 31,

 
2013
2012
Series A convertible preferred stock, $0.001 par value,
 
 
 no shares authorized or outstanding at September 30, 2013 (unaudited) and 14,720,000 shares authorized and 1,735,565 shares issued and outstanding at December 31, 2012, respectively. Liquidation preference of $0 and $14,500 at September 30, 2013 (unaudited) and December 31, 2012, respectively.

14,346

Series B convertible preferred stock, $0.001 par value,
 
 
no shares authorized, issued or outstanding at September 30, 2013 (unaudited) and 8,600,000 authorized, 1,029,369 issued and outstanding at December 31, 2012, respectively. Liquidation preference of $0 and $12,040 at September 30, 2013 (unaudited) and December 31, 2012, respectively.

11,983

Series C convertible preferred stock, par value $0.001,
 
 
no shares authorized at September 30, 2013 (unaudited) and 17,350,000 shares authorized at December 31, 2012, respectively. No shares issued and outstanding at September 30, 2013 and 2,075,390 shares issued and outstanding December 31, 2012. Liquidation preference of $0 and $35,521 at September 30, 2013 (unaudited) and December 31, 2012, respectively.

35,414

Common Stock
In June 2005, the Company issued 574,531 shares of common stock at $ 0.009 per share to its founders in exchange for cash proceeds of $5,000 .
On July 15, 2013, Private Ocera completed the Merger with Tranzyme as discussed in Note 1. In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc. and the name of Private Ocera was changed to Ocera Subsidiary, Inc.
Immediately prior to the effective time of the Merger, the principal and interest under Private Ocera's outstanding convertible notes converted into shares of Series C Preferred Stock of Private Ocera, and, immediately thereafter, all outstanding preferred stock of Private Ocera converted into the common stock of Private Ocera.
At the effective time of the Merger, each outstanding share of Ocera's common stock was converted into the right to receive approximately 0.11969414 shares of Tranzyme's common stock (the “Exchange Ratio”), with cash paid in lieu of any fractional shares.
Pursuant to the Securities Purchase Agreement dated April 23, 2013, immediately following the consummation of the Merger, the combined company sold 3,317,796 shares of common stock for approximately $20.0 million of its Common Stock to the parties at a per share purchase price of $ 6.0264 (the "Financing").
In connection with the Merger, the combined company changed its name to Ocera Therapeutics, Inc. and the name of Private Ocera was changed to Ocera Subsidiary, Inc. After giving effect to the Merger and the Financing, the combined company had 11,287,943 shares of common Stock outstanding.
The following table summarizes common stock issuances during the nine months ended September 30, 2013:

15




 
Common Stock Outstanding (# of shares)
 
(unaudited)
Common stock outstanding, December 31, 2012
626,593

Conversion of promissory note and accrued interest
186,217

Conversion of convertible preferred stock
4,840,324

Held by Tranzyme shareholders upon completion of merger
2,300,036

Issued pursuant to Financing Agreement
3,317,976

Exercise of common stock options
19,927

Common stock outstanding, September 30, 2013
11,291,073

Stock Based Compensation
In 2005, the Company adopted the Ocera Therapeutics, Inc. 2005 Stock Plan (the "Plan"). At the effective time of the Merger, each outstanding stock option to purchase common stock of Private Ocera under the Plan not exercised immediately prior to the effective time of the Merger, whether or not vested, was assumed by the Company and became exercisable for shares of the registrant’s common stock in accordance with the terms of the Merger Agreement and the Company assumed the 2005 Plan. As of September 30, 2013, no options remain available for future grant under the Plan.
On March 3, 2011 the Company’s Board of Directors adopted, and stockholders subsequently approved, the 2011 Stock Option and Incentive Plan, (the “2011 Plan”) which authorized the issuance of up to 218,995 shares of common stock under the plan.
On April 19, 2012, the Company's Board of Directors adopted, and on June 7, 2012 the Company's stockholders approved, an amendment and restatement of the 2011 Plan which authorized the issuance of an additional 83,333 shares of common stock under the amended and restated 2011 Plan.
On August 13, 2013, the Company’s board of directors approved an amendment to the 2011 Plan to increase the maximum number of shares that may be issued under the plan from 302,328 to 2,302,328 shares. In connection with this amendment, the Company’s board of directors authorized the grant of an aggregate of 1,454,200 common stock options to its employees. In addition, on August 30, 2013, the Company’s board of directors authorized the grant of an aggregate of 140,000 common stock options to non-employee members of the board of directors. The amendment to the 2011 Plan and the common stock option grants are subject to stockholder approval within twelve months from August 13, 2013. If stockholder approval is not obtained, the increase to the number of shares issuable under the 2011 plan will not be effective and the stock option grants shall terminate. Given that the options are subject to shareholder approval of the increase to the plan, the Company does not consider the awards to be outstanding for financial accounting purposes.
As of September 30, 2013 the Company had 664,216 stock options outstanding at a weighted average exercise price of $ 15.34 .
In June 2012, the Company issued 61,653 shares of common stock options to an executive. One-half of the stock options vest monthly over a one year period from the vesting commencement date. The remainder of the stock options are performance based and would vest upon the closing of certain strategic or financing transactions. In April 2013, the terms of the stock option agreement were modified to further define the meaning of strategic or financing transactions such as the Merger Agreement. On July 15, 2013 as a result of the Merger, the performance based portion of the stock option vested and $ 153,000 of stock compensation expense was recorded for the three and nine months ended September 30, 2013.

16




The Company recognized stock based compensation expense as follows (in thousands):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2013
2012
2013
2012
 
(unaudited)
(unaudited)
Research and development
$
2

$
4

$
6

$
22

General and administrative
200

26

228

106

Total
$
202

$
30

$
234

$
128


Since December 20, 2004 (inception) to September 30, 2013, the Company has incurred $1,115,000 of stock based compensation expense.

7. Merger with Tranzyme, Inc.
On July 15, 2013 Merger Sub”, a wholly owned subsidiary of Tranzyme, completed its Merger with Private Ocera.
    
The Merger was accounted for as a reverse merger under the acquisition method of accounting. Under the acquisition method of accounting, Private Ocera was treated as the accounting acquiror and Tranzyme was treated as the “acquired” company for financial reporting purposes as, immediately upon completion of the Merger, Private Ocera stockholders held a majority of the voting interest of the combined company. In addition, six of the nine members of the board of directors of the combined company were former members of Private Ocera board of directors. Therefore, the former members of Private Ocera board of directors possess majority control of the board of directors of the combined company.

The purchase price for Tranzyme is as follows (in thousands):
 
Fair value of Tranzyme shares outstanding
$
13,249

Fair value of vested Tranzyme stock options
275

Purchase Price
$
13,524


In accordance with ASC 805, the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their estimated fair values on the date of acquisition based on valuations performed by a third party. The Company engaged a third party valuation firm to assist management in its analysis of the fair value of Tranzyme. All estimates, key assumptions, and forecasts were either provided by or reviewed by management. While the Company chose to utilize a third party valuation firm, the fair value analysis and related valuations represent the conclusions of management and not the conclusions or statements of any third party.
The following table summarizes the preliminary determination of the purchase price to the assets acquired and liabilities assumed (in thousands):

 
Purchase Price
Cash and cash equivalents
$
7,464

Accounts and investment tax credits receivable, net
636

Prepaid expenses and other assets
159

Fixed assets
744

Intangible assets
5,940

Goodwill
917

Accounts payable
(1,029
)
Accrued and long-term liabilities
(1,307
)
 
$
13,524


17





The recorded amounts for assets and liabilities are provisional and subject to change.

Intangible assets are being amortized on a straight-line basis and include the following as of September 30, 2013 (in thousands, except for useful life):

 
Amount
Useful life
Customer relationships
$
4,180

2.5 to 5 years
Developed technology
1,760

5 years
 
$
5,940

 

The Company believes that the historical values of Tranzyme's current assets and current liabilities approximate their fair value based on the short-term nature of such items. Tranzyme's property and equipment consists of assets whose historical cost less depreciation is deemed to be its fair value. The identifiable intangible assets are Tranzyme’s technology, which consists primarily of its intellectual property related to Tranzyme’s MATCH TM technology, and the estimated net present value of future cash flows from collaborative agreements to be generated from the MATCH TM technology used in the development activities.
The collaboration agreements were valued using a risk adjusted multi-period excess earnings analysis, a form of the income approach, which incorporates the estimated future cash flows to be generated from these relationship assets. Excess earnings are the earnings remaining after deducting the market rates of return on the estimated values of contributory assets, including debt-free net working capital, tangible and intangible assets. The excess earnings are thereby calculated for each year of a multi-year projection period, factored for industry-wide probabilities of success and discounted to a present value. Accordingly, the primary components of this method consist of the determination of excess earnings and an appropriate rate of return.
The valuation of the Tranzyme's proprietary MATCH TM technology is based on replacement method of the cost approach that considers the cost to replace the acquired technology. The cost approach is based on the premise that a prudent investor would pay no more for an asset than its replacement or reproduction cost. The cost to replace the asset would include the cost of constructing a similar asset of equivalent utility at prices applicable at the time of the valuation analysis. The estimated fair value attributed to the developed technology is amortized over a weighted average useful life of approximately 5 years .
Goodwill is calculated as the difference between the fair value of the consideration expected to be transferred and the values assigned to the identifiable tangible and intangible assets acquired and liabilities assumed.
The Company has included the results of operations of Tranzyme, Inc. in its consolidated financial statements subsequent to July 15, 2013, the date of the Merger. The unaudited financial information in the table below summarizes the combined results of operations of the Company and Tranzyme, on a pro forma basis, as though the companies had been combined as of the beginning of the period presented in thousands:
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2013
2012
2013
2012
 
(unaudited)
Licensing and royalty revenue
$
200

$
1,819

$
1,692

$
6,838

Net loss
$
(6,753
)
$
(5,042
)
$
(13,146
)
$
(21,673
)
Net loss per share, basic and diluted
$
(0.60
)
$
(0.45
)
$
(1.16
)
$
(1.92
)
    
8. Goodwill and acquired intangible assets
Goodwill of $0.9 million was recorded pursuant to the merger with Tranzyme in July, 2013. There were no impairments or other additions to goodwill during the periods presented.
The net book value of acquired intangible assets as of September 30, 2013 were as follows in thousands:

18




 
 
 
Accumulated
 
 
Weighted Average
 
 
 
Amortization
 
 
Remaining
 
 
 
and
 
 
Useful Life
 
Gross
 
Impairments
 
Net
(in years)
Customer relationships
$
4,180

 
$
(1,768
)
 
$
2,412

2.25 - 4.75
Developed technology
1,760

 
(73
)
 
1,687

4.75
 
$
5,940

 
(1,841
)
 
$
4,099

 
The estimated future amortization expense of purchased intangible assets as of September 30, 2013 is $ 0.2 million for the three months ended December 31, 2013 and $ 0.9 million, $ 0.9 million, $ 0.8 million, $ 0.8 million and $0.4 million for the years ended December 31, 2014, 2015, 2016, 2017 and 2018, respectively.

9. Restructuring of Tranzyme Pharma Inc. (Sherbrooke, Quebec)
In September 2013, Ocera approved a restructuring plan related to the operations of its Sherbrooke, Quebec facility (the "Sherbrooke Facility") in order to focus its management and resources on the clinical development of OCR-002. In connection with the restructuring, the Company will terminate employees at the Canadian location, exit its facility and terminate certain contractual obligations. The Company expects to incur cash expenses of approximately $900,000 to $ 1.1 million in connection with the restructuring plan. These expenses and charges include (i) an estimate of approximately $ 100,000 to $ 200,000 associated with the termination of operating activities in the leased office and laboratory space at the Sherbrooke Facility; (ii) an estimate of approximately $ 700,000 to $ 800,000 associated with the separation from employment of 17 employees at the Sherbrooke Facility; (iii) an estimate of approximately $ 100,000 in other liabilities related to the restructuring plan.
Restructuring charges of $742,000 were recorded during the three months ended September 30, 2013. The following table summarizes the Company’s restructuring activities during the three months ended September 30, 2013 in thousands:
 
Post- Employment Benefits
Operating Activities
Other liabilities
Total
Restructuring charges
$
708

$
34

$

$
742

Cash payments and other settlements




Accrual balances at September 30, 2013
$
708

$
34

$

$
742


10. Impairment of Intangible Asset
During the third quarter review of the Bristol-Myers Squibb (BMS) collaboration agreement, the Company determined that BMS will terminate its efforts on the development of one of two macrocyclic compounds under development pursuant to the Company's on-going collaboration agreement. As a result, the Company concluded that the expected undiscounted cash flows from the terminated compound was zero and the Company had an impairment of 50% of the intangible asset value associated with the agreement. The Company expensed $1.6 million as a result of the impairment during the three months ended September 30, 2013.

11. Commitments and Contingencies

From time to time, the Company may be involved in disputes, including litigation, relating to claims arising out of operations in the normal course of our business. Any of these claims could subject the Company to costly legal expenses and, while the Company generally believes that it has adequate insurance to cover many different types of liabilities, our insurance carriers may deny coverage or our policy limits may be inadequate to fully satisfy any damage awards or settlements. If this were to happen, the payment of any such awards could have a material adverse effect on the Company's consolidated results of operations and financial position. Additionally, any such claims, whether or not successful, could damage our reputation and business. The Company is currently not a party to any legal proceedings, the adverse outcome of which, in management’s

19




opinion, individually or in the aggregate, would have a material adverse effect on our consolidated results of operations or financial position.


12. Subsequent Events
Securities Purchase Agreement
 
On November 8, 2013, the Company closed on the a private placement pursuant to the Securities Purchase Agreement (the “Purchase Agreement”) by and among the Company and entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein (collectively, the “Purchasers”). The Company sold and issued, and the Purchasers purchased, an aggregate of 3,940,887 units (“Units”) for an aggregate purchase price of $28.0 million . Each Unit consisted of one share of Common Stock and warrants to acquire 0.20 shares of Common Stock at an exercise price of $7.663 per share (“Warrants”). The Units consist of an aggregate of 3,940,887 shares of Common Stock (the “Shares”) and Warrants exercisable for an aggregate of 788,177 shares of Common Stock (the “Warrant Shares”).
 
Registration Rights Agreement
 
Pursuant to the terms of the Purchase Agreement, the Company and the Purchasers entered into the Registration Rights Agreement (the “Registration Rights Agreement”) concurrently with entering into the Purchase Agreement. Within 30 calendar days after November 8, 2013 (the “Closing”), the Company will be required to file with the Securities and Exchange Commission (the “SEC”) a registration statement covering the resale by the Purchasers or their permitted transferees the Shares, Warrant Shares and any securities issued or issuable with respect to the Shares or Warrant Shares as a result of a stock split, dividend or other distribution, recapitalization or similar event (collectively, the “Registrable Securities”), provided that with respect to a holder of Registrable Securities, such holder’s Shares or Warrant Shares shall cease to be Registrable Securities upon the earliest to occur of (x) any such securities are sold pursuant to a registration statement or Rule 144 under the Securities Act, and (y) two years from the date of the Closing.


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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management's Discussion and Analysis of Financial Condition and Results of Operations

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to the “safe harbor” created by those sections. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. All statements other than statements of historical facts are “forward-looking statements” for purposes of these provisions, including any projections or earnings. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” and similar expressions intended to identify forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. We discuss many of these risks, uncertainties and other factors in this Quarterly Report on Form 10-Q in greater detail under the heading “Risk Factors.” Given these risks, uncertainties and other factors, you should not place undue reliance on these forward-looking statements. Also, these forward-looking statements represent our estimates and assumptions only as of the date of this filing. You should read this Quarterly Report on Form 10-Q completely and with the understanding that our actual future results may be materially different from what we expect. We hereby qualify our forward-looking statements by these cautionary statements. Except as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available in the future.

Overview

We are a clinical stage biopharmaceutical company focused on the development of OCR-002 for the treatment of acute and chronic hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury.

OCR-002 is a novel, proprietary molecule comprised of phenylacetate bound with ornithine functioning as an ammonia scavenger to treat acute and chronic HE.

OCR-002 has received Orphan Drug designation and Fast Track status from the U.S. Food and Drug Administration, or FDA, for the treatment of hyperammonemia and resultant HE in patients with acute liver failure or acute on chronic liver disease.

Our strategy is to focus clinical development activities on the intravenous form of OCR-002 to treat acute HE in hospitalized patients while beginning formulation work on the oral form of OCR-002 which would focus on acute-to-chronic care of HE patients.

Clinical Activity

We commenced a Phase 2b study of OCR-002 and expect to begin patient enrollment by the end of 2013. We expect the study to include approximately 200 patients and to be designed as a randomized, double-blind, placebo-controlled, efficacy study as a treatment for acute HE in hospitalized patients with liver cirrhosis.

Previously, we completed Phase 1 studies in both healthy volunteers and patients with liver cirrhosis using the intravenous formulation of OCR-002. These studies established safety, tolerability and target dose for OCR-002. There are also two externally sponsored Phase 2a studies underway:

An investigator sponsored study in patients with known liver cirrhosis and elevated ammonia due to upper gastrointestinal bleeding, or UGIB. UGIB is a complication of liver cirrhosis, and often leads to acute HE. The open label phase of this study showed a rapid and durable ammonia reduction within 36 hours of initiation of infusion of OCR-002. The second part of this study, a double-blind, placebo-controlled study to measure ammonia plasma concentration and improvement in HE is currently enrolling. We expect to review results of this study in 2014.


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A study funded by the National Institutes of Health for the Acute Liver Failure Study Group (ALFSG) to evaluate OCR-002 for the treatment of patients with acute liver injury and acute liver failure due to acetaminophen overdose. We expect to review results from the first cohort of this study in 2014.

Merger

On July 15, 2013, Tranzyme, Inc., or Tranzyme, completed its merger, or the Merger, with Ocera Therapeutics, Inc., a privately held Delaware corporation, or Private Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among Tranzyme, Private Ocera and Terrapin Acquisition, Inc., a wholly-owned subsidiary of Tranzyme, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Private Ocera, with Private Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as a wholly-owned subsidiary of the combined company. Immediately following the Merger, the combined company changed its name from “Tranzyme, Inc.” to “Ocera Therapeutics, Inc.”

In September 2013, we approved a restructuring plan related to Tranzyme Pharma, Inc., our Canadian subsidiary acquired in the Merger that previously housed the research operations of Tranzyme, including Tranzyme’s proprietary chemistry technology platform, MATCH (Macrocyclic Template Chemistry), used to develop its pre-clinical and clinical stage product candidates. The goal of the restructuring plan is to enable us to focus management and financial resources on advancing OCR-002. On November 11, 2013 we terminated most employees at the Canadian location except those needed for final closure of the facility. We expect to incur expenses and charges during the fourth quarter of 2013 in connection with the restructuring plan. These expenses and charges are estimated to be in the range of $900,000 to $1.1 million, and will include, without limitation, severance and related benefit costs, asset impairment expenses, termination costs associated with contractual obligations and other liabilities.

In December 2009, Tranzyme entered into a two-year collaboration agreement with Bristol-Myers Squibb Company, or BMS, to discover, develop and commercialize novel macrocyclic compounds, other than Tranzyme's product candidates and internal programs, directed against a limited number of targets of interest to BMS. On January 4, 2013, Tranzyme announced the successful completion of its chemistry-based drug discovery collaboration with BMS. As a result of the joint research efforts, we transferred compounds to BMS for further development across multiple drug targets. Under the terms of the agreement, BMS is solely responsible for preclinical and clinical development of all products arising from the collaboration and for their commercialization globally. In connection with the agreement, we may receive up to approximately $80.0 million in additional development milestone payments, and $30.0 million in sales milestone payments, for each target program if development and regulatory milestones, or commercial milestones, respectively, are achieved. In addition, we would receive graduated single-digit percentage royalties and sales milestone payments on annual net sales of commercial products. In October, 2013, we determined that it was more likely than not that BMS would terminate development efforts on one of the compounds transferred upon completion of the collaboration.

Financings

On April 23, 2013, concurrently with the execution of the Merger Agreement, Tranzyme entered into a Securities Purchase Agreement with certain former Private Ocera stockholders and their affiliates into a Registration Rights Agreement that granted customary registration rights to the participants of the Financing. Pursuant to the Securities Purchase Agreement, immediately following the consummation of the Merger, we sold approximately $20 million of our common stock to the parties at a per share purchase price of $6.0264.

On November 8, 2013, we closed on a private placement financing contemplated by the Securities Purchase Agreement, or the Agreement, dated as of November 5, 2013 by and among the entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein, or the Purchasers, pursuant to which we issued an aggregate of 3,940,887 units, or Units, for an aggregate purchase price of $28 million. Each Unit consisted of one share of our Common Stock and a warrant to acquire 0.20 shares of our Common Stock at an exercise price of $7.663 per share, or Warrants. The Units consist of an aggregate of 3,940,887 shares of Common Stock, or the Shares, and Warrants exercisable for an aggregate of 788,177 shares of our Common Stock, or the Warrant Shares. Concurrently with the execution of the Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the Purchasers. We are required to file a registration statement registering the resale of the Shares and Warrant Shares within 30 days of the closing.

    


22





Financial Overview
Revenue
We are a development stage company and have generated no revenue from the sale of products since inception. We do not expect to generate any revenue from our existing product candidates unless or until we commercialize or enter into a strategic alliance for OCR-002.
Research and Development Expenses
Since our inception, we have focused on the development of our product candidates. Our research and development expenses consist primarily of:
salaries and related expenses for personnel, including expenses related to stock options or other stock‑based compensation granted to personnel in development functions;

fees paid to clinical trial sites and vendors, including clinical research organizations in connection with our clinical trials, costs of acquiring and evaluating clinical trial data such as investigator grants, patient screening fees, laboratory work and statistical compilation and analysis, and fees paid to clinical consultants;

expenses related to formulation development, production of clinical supplies, including fees paid to contract manufacturers;

expenses related to pre-clinical studies;

expenses related to license fees under in-licensing agreements;

other consulting fees paid to third parties;

expenses related to compliance with drug development regulatory requirements in the United States, the European Union and other foreign jurisdictions; and

depreciation, facility and other allocated expenses.

We record research and development expenses as they are incurred. We have been developing OCR-002 and AST-120 in parallel, and typically use our employees, consultants and infrastructure resources across our two programs. Thus, some of our research and development expenses are not attributable to an individual program, but rather are allocated across our two programs and these costs are included in other research and development expense as detailed below. Allocated expenses include salaries, stock based compensation and related benefit expenses for our employees, and fees paid for clinical studies and contract manufacturing expenses. The following table shows our research and development expenses for the three and nine months ended September 30, 2013 and 2012:

 
Three Months Ended
September 30,
Nine Months Ended
September 30,
(in thousands)
2013
2012
2013
2012
 
(unaudited)
(unaudited)
OCR-002
$
599

$
224

$
620

$
599

AST-120
23

6

38

48

Other research and development expenses
1,232

196

1,630

699

Total
$
1,854

$
426

$
2,288

$
1,346


We expect our research and development expenses to increase when we initiate our Phase 2b trial of OCR-002 and continue development of our oral formulation to treat and prevent recurrences of HE. Due to the inherently unpredictable nature of product development, we are currently unable to estimate the expenses we will incur in the continued development of OCR-002.

23




Our research and development expenditures are subject to numerous uncertainties in timing and cost to completion. Development timelines, the probability of success and development expenses can differ materially from expectations. Clinical trials may be difficult to enroll given the small number of patients with certain of our target indications. Completion of clinical trials may take several years or more, but the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical development, including, among others:
    the number of trials required for approval;

    the number of sites included in the trials;

    the length of time required to enroll suitable patients;

    the number of patients that participate in the trials;

    the drop-out or discontinuation rates of patients;

    the duration of patient follow-up;

    the number and complexity of analyses and tests performed during the trial;

    the phase of development of the product candidate; and

    the efficacy and safety profile of the product candidate.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
As a result of the uncertainties discussed above, we are unable to determine with certainty the duration and completion costs of its development programs. We will need to raise additional capital and may seek strategic alliances in the future to advance our programs.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries, benefits and stock‑based compensation for employees in executive, finance, business development and support functions. Other significant expenses include the costs associated with obtaining and maintaining our patents portfolio, professional fees for accounting and legal services, travel and allocated facilities and other expenses.
We expect our general and administrative expenses will increase in the future as we expand our operating activities, maintain and expand our patent portfolio, and incur additional costs associated with being a public company. We expect increased expenses for legal fees, accounting fees, director and officers' liability insurance, and investor relations fees.
Critical Accounting Policies and Estimates
The preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the revenues and expenses incurred during the reported periods. On an ongoing basis, we evaluate our estimates and judgments related to preclinical, nonclinical and clinical development costs and drug manufacturing costs. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We discussed accounting policies and assumptions that involve a higher degree of judgment and complexity in the notes to our audited financial statements for the year ended December 31, 2012 included as Exhibit 99.2 to our Current Report on Form 8K/A filed on September 27, 2013 and our Management's Discussion and Analysis of Financial Condition and Results of Operations included in

24




Tranzyme's Definitive Proxy Statement filed with the SEC on June 10, 2013. There have been no material changes to our critical accounting policies and estimates as disclosed in the notes to our audited financial statements except as described below.

Business Combinations
    We accounted for the merger with Tranzyme as a reverse merger under the acquisition method of accounting. The consideration paid to acquire Tranzyme was measured at fair value and included the exchange of our common stock and assumption of vested stock options. This allocation of the purchase price resulted in recognition of intangible assets related to customer relationships, developed technology and goodwill. The allocation of purchase price requires us to make significant estimates and assumptions. The key assumptions in determining the fair value of intangible assets were the discount rate and the probability assigned to the milestone or royalty being achieved. Changes in the fair value may result from either the passage of time or events occurring after the acquisition date, such as changes in the estimate of the probability of achieving the milestone or royalty.
Intangible Assets and Goodwill
We recorded intangible assets and goodwill upon the acquisition of Tranzyme on July 15, 2013. Acquired intangible assets are amortized on a straight-line basis over the remaining estimated economic life of 2.5 to 5 years. We review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. Recoverability of an asset is measured by comparing its carrying amount to the expected future undiscounted cash flows that the asset group is expected to generate. If it is determined that the carrying amount is not recoverable, an impairment loss is recorded in the amount by which the carrying amount of the asset exceeds its fair value. We recorded an impairment loss of $1.6 million in the three months ended September 30, 2013 due to the termination of work on one of two macrocyclic compounds under collaboration with Bristol-Myers Squibb.
We perform an annual qualitative assessment of its goodwill to determine if any events or circumstances exist, such as an adverse change in business climate or adverse developmental or regulatory results of OCR-002, that would indicate that it would more likely than not reduce the fair value of a reporting unit below its carrying amount, including goodwill. If events or circumstances do not indicate that the fair value of a reporting unit is below its carrying amount, then goodwill is not considered to be impaired and no further testing is required. The determination of fair value requires significant judgment and estimates. There has been no impairment of goodwill for any periods presented.
Results of Operations
Three-month and Nine-month Periods Ended September 30, 2013 and 2012     
 
Three Months Ended
September 30,
Nine Months Ended
September 30,
 
2013
2012
2013
2012
 
(unaudited)
(unaudited)
Revenue
 
 
 
 
Licensing and other revenue
$
200

$

$
200,000

$

Total Revenue
200


200,000


Operating expenses:








Research and development
1,854

426

2,288

1,346

General and administrative
3,158

352

5,381

1,395

Amortization of intangibles
265


265


Restructuring charges
742


742


Impairment of intangibles
1,576


1,576


Total operating expenses
7,595

778

10,252

2,741

Total other income (expense), net
(9)

(42)

(170)

(141)

Net loss
$
(7,404
)
$
(820
)
$
(10,222
)
$(2,882)
Foreign currency translation adjustment
2


2


Comprehensive loss
$
(7,402
)
$
(820
)
$
(10,220
)
$
(2,882
)

25





Revenues

We generated $0.2 million in revenue in each of the three and nine month periods ending September 30, 2013 from nonrefundable payments received upon transfer of material to third parties and royalty revenue from a licensing agreement compared with no revenue for the same periods in 2012.

Costs and Expenses

Research and Development Expenses

Our research and development expenses increased by $1.4 and $0.9 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The increase in expenses for the three and nine month periods was primarily due to the commencement of our Phase 2b trial for OCR-002 and expenses incurred in operating our Canadian facility acquired in the Merger.

We expect our research and development expenses to increase as we continue our Phase 2b trial of OCR-002 and commence development of our oral formulation to treat and prevent recurrences of HE.

Our expenses related to clinical trials are based on estimates of patient enrollment and related expenses at clinical investigator sites as well as estimates for the services received and efforts expended pursuant to contracts with multiple research institutions and contract research organizations that may be used to conduct and manage clinical trials on our behalf. We generally accrue expenses related to clinical trials based on contracted amounts applied to the level of patient enrollment and activity. If timelines or contracts are modified based upon changes in the clinical trial protocol or scope of work to be performed, we modify our estimates of accrued expenses accordingly on a prospective basis.
Due to the significant risks and uncertainties inherent in the clinical development and regulatory approval processes, we cannot reasonably estimate the cost to complete projects and development timelines for their completion. Enrollment in clinical trials might be delayed or occur faster than anticipated for reasons beyond our control, requiring additional cost and time or accelerating spending. Results from clinical trials might not be favorable, or might require us to perform additional unplanned clinical trials, accelerating spending, requiring additional cost and time, or resulting in termination of the project. Regulatory reviews can also be delayed. Process development and manufacturing scale-up for production of clinical and commercial product supplies might take longer and cost more than our forecasts. As a result, clinical development and regulatory programs are subject to risks and changes that might significantly impact cost projections and timelines.

General and Administrative Expenses

Our general and administrative expenses increased by $2.8 and $4.0 million for the three and nine months ended September 30, 2013, respectively, compared to the same periods in 2012. The increase in general and administrative expense was primarily due to expenses incurred for the merger transaction, including employee severance, legal and accounting fees and other expenses associated with our corporate governance including directors and officer insurance and fees.
We expect that our general and administrative expenses may increase in the future as we expand our operating activities, maintain and expand our patent portfolio, and incur additional costs associated with public company support including legal fees, accounting fees, director and officers' liability insurance, and investor relations fees.

Amortization of intangibles

During the three months ended September 30, 2013, we capitalized approximately $5.9 million of intangible assets acquired in the Merger. We recognized $265,000 for the amortization of the intangible assets for the three and nine months ended September 30, 2013 as compared to no amortization in the same periods of 2012.

Restructuring expenses

During the three months ended September 30, 2013, we approved a restructuring plan related to the operations of our Sherbrooke, Quebec facility in order to focus its management and resources on the clinical development of OCR-002. Restructuring expenses for the three and nine months ended September 30, 2013 totaled $742,000.



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Impairment of intangibles

During the three months ended September 30, 2013, we determined that BMS will terminate its efforts on the development of one of two macrocyclic compounds under development pursuant to our on-going collaboration agreement. As a result, we expensed $1.6 million of asset impairment associated with the termination of development pursuant to the agreement.

Other Income (Expense), Net

Interest expense consists primarily of interest accrued and amortization of debt issuance costs on convertible notes payable and the change in fair value of preferred stock warrants. The decrease in interest income (expense) for the three months ended September 30, 2013 compared to the same period in the prior year is due to the conversion of convertible notes payable to common stock as a result of the merger. Preferred stock warrants were converted to common stock warrants as a result of the merger eliminating the terms that caused the change in fair value of the warrants to be recorded in operating results, The increase for the nine month period ended September 30, 2013 was primarily due to interest accrued and amortization of debt issuance costs on our convertible notes payable.

Liquidity and Capital Resources
Cash Flows

The following table summarizes our cash flows for the nine months ended September 30, 2013 and 2012:
 
Nine Months Ended September 30,
(in thousands)
2013
 
2012
Cash flow from continuing operations:
 
 
 
Operating activities
$
(8,067
)
 
$
(3,319
)
Investing activities
7,459

 
248

Financing activities
19,996

 
1,513

Net cash provided by (used in) operations
$
19,388

 
$
(1,558
)
Comparison of the Nine Months Ended September 30, 2013 and 2012
The primary use of cash in operating activities for nine months ended September 30, 2013 was primarily due to our net losses from the operation of our business, including expenses incurred for the development of OCR-002 and expenses related to the Merger and changes in working capital, partially offset by non-cash charges including depreciation expense, share-based compensation expense and the amortization of and impairment of intangibles purchased in the merger. Cash used in operating activities for nine months ended September 30, 2012 was primarily related to our net loss of $3.3 million during such period offset by changes in working capital and non-cash charges including depreciation expense, share-based compensation expense and changes in the value of our warrant liability.
Cash used in investing activities for the nine months ended September 30, 2013 related to purchases of equipment for our corporate offices. For the nine months ended September 30, 2012 , net cash provided by investing activities primarily related to the maturity of investments used to fund operations.
Net cash provided by financing activities for the nine months ended September 30, 2013 related to proceeds from issuance of common stock and cash received in the Merger. Net cash provided by financing activities for the nine months ended September 30, 2012 resulted from the issuance of $1.5 million of convertible notes in March 2012.
The Combined Company Following the Merger

We believe the Merger will form a leading orphan liver disease biopharmeutical company. The combined company's lead drug candidate is OCR-002, for patients with acute and chronic liver diseases, an area of high unmet medical need. OCR-002 is an ammonia scavenger designed to treat hyperammonemia (elevated ammonia in the blood) and associated HE, a complication of patients with liver cirrhosis. We licensed the compound from UCL Business PLC in 2008.

27




OCR-002 has received Orphan Drug designation and Fast Track status from the FDA for the treatment of hyperammonemia and associated HE in patients with liver cirrhosis, acute liver failure and acute liver injury. We have completed Phase 1 and 2a studies in both healthy volunteers and patients with liver cirrhosis using the injectable formulation of OCR-002. These studies established safety, tolerability and target dose for OCR-002.
In addition, OCR-002 is the subject of two ongoing, externally-sponsored Phase 2a studies. The first of these studies is evaluating OCR-002 in patients with known liver cirrhosis and elevated ammonia due to upper gastrointestinal bleeding, or UGIB. UGIB is a complication of liver cirrhosis, and often leads to acute HE. The open label phase of this study demonstrated that OCR-002 provides rapid and durable ammonia reduction within 36 hours of treatment. The second part of this study, a double-blind, placebo-controlled study to measure ammonia plasma concentration and improvement in HE is currently enrolling. Data from this study is expected in 2014.
The second externally sponsored Phase 2a study is with the Acute Liver Failure Study Group or the ALFSG, funded by the National Institutes of Health. The ALSFG is studying OCR-002 for the treatment of patients with acute liver injury and acute liver failure due to acetaminophen overdose. We have initiated a Phase 2b, randomized, double-blind, placebo-controlled, efficacy study of OCR-002 as a treatment for acute hepatic encephalopathy in hospitalized patients with liver cirrhosis. The study is expected to have approximately 200 patients, and enrollment is expected to begin in late 2013.
Capital Resources and Funding Requirements
We will require additional funds to support future operations including our development activities associated with the IV and oral forms of OCR-002. Our future funding requirements depends on many factors, including, but not limited to the progress, timing, scope and costs of our nonclinical studies and clinical trials including the ability to enroll patients on a timely basis in our planned and potential future clinical trials, the time and cost necessary to respond to technological, market or governmental developments, and the cost of filing, prosecuting, defending and enforcing any patent claims or other intellectual property rights.
We expect to fund expenses from our current cash and cash equivalents, possible strategic opportunities and potentially additional financing transactions or collaboration arrangements. We believe that our current cash and cash equivalents will be sufficient to fund our operations for at least the next twelve months. On November 8, 2013, we closed on a private placement financing contemplated by the Securities Purchase Agreement, or the Agreement, dated as of November 4, 2013 by and among the us and entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein, pursuant to which we issued an aggregate of 3,940,887 units, or Units, for an aggregate purchase price of $28 million. Each Unit consisted of one share of our Common Stock and a warrant to acquire 0.20 shares of our Common Stock at an exercise price of $7.663 per share, or Warrants. The Units consist of an aggregate of 3,940,887 shares of Common Stock, or the Shares, and Warrants exercisable for an aggregate of 788,177 shares of our Common Stock, or the Warrant Shares.
We have based our estimates of our cash needs on a number of assumptions that may prove to be wrong, and changing circumstances beyond our control may cause us to consume capital more rapidly than we currently anticipate. For example, our OCR-002 Phase IIb clinical trial may cost more than we expect. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidate, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated clinical trials. If adequate funds are not available to us on a timely basis, or at all, we may be required to terminate or delay clinical trials or other development activities for OCR-002.
Our ability to finance operations beyond our current resources will depend heavily on our ability to obtain favorable results in clinical trials of OCR-002 and to develop and commercialize OCR-002 successfully. Additional financing may not be available when we need it or may not be available on terms that are favorable to us. We may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. We may seek to raise additional capital through a combination of private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends.

Off-Balance Sheet Arrangements

28




     We do not currently have, and did not have during the periods presented, any off-balance sheet arrangements, as defined under SEC rules. 

29




Item 3.         Quantitative and Qualitative Disclosures About Market Risk
 
Foreign Currency Risk
    
We incur research and development expenses through our Canadian subsidiary. In addition, Ocera has historically contracted with third-party providers to manufacture product and to conduct clinical trials and perform other research and development activities in Europe. Accordingly, we are exposed to fluctuations in foreign currency exchange rates in connection with the liabilities incurred by us in these relationships. We do not currently hedge our exposures to foreign currency fluctuations.
 
Market Risk
 
Our cash and cash equivalents as of September 30, 2013, consisted primarily of cash and money market funds. Our primary exposure to market risk is interest income sensitivity, which is affected by changes in the general level of United States interest rates. However, because of the short-term nature of the instruments in our portfolio, a sudden change in market interest rates would not be expected to have a material impact on our financial condition and/or results of operations.
 
    
Item 4.        Controls and Procedures
 
Disclosure Controls and Procedures
 
Our management, including our principal executive officer and our principal financial officer, evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act.  In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes to Internal Controls Over Financial Reporting
 
In connection with entering into the Merger Agreement with Tranzyme, Inc. in April 2013, which closed effective July 15, 2013, we have developed and will continue to develop additional internal controls over our acquisition process. Except for the development of additional internal controls over accounting for acquisitions, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

A controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

PART II. OTHER INFORMATION

Item 1.            Legal Proceedings
 
We are not currently subject to any material legal proceedings.
 

Item 1A.   Risk Factors

30





 We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. The risk factors described below pertain to the combined company following the closing of the Merger effected July 15, 2013 as described elsewhere in this Quarterly Report on Form 10-Q. These risk factors should be carefully considered, which risk factors could materially affect the combined business, its financial conditions or future results.
Risks Related to Our Business and the Development, Regulatory Approval and Commercialization of our Product Candidates
The failure to integrate successfully the businesses of the combined company could adversely affect our future results.
The success of the Merger will depend, in large part, on our ability to realize the anticipated benefits from combining the businesses of Tranzyme and Private Ocera. The failure to integrate successfully and to manage successfully the challenges presented by the integration process may result in our failure to achieve some or all of the anticipated benefits of the Merger. Potential difficulties that may be encountered in the integration process include the following:
using our cash and assets efficiently to develop our business;
appropriately managing our liabilities;
potential unknown or currently unquantifiable liabilities associated with the Merger and our operations; and
performance shortfalls as a result of the diversion of the management's attention caused by integrating the companies' operations.
Our success will depend in part on relationships with third parties, which relationships may be affected by third-party preferences or public attitudes about the Merger. Any adverse changes in these relationships could adversely affect our business, financial condition or results of operations.
Our success will be dependent on our ability to maintain and renew the business relationships of both Tranzyme and Private Ocera and to establish new business relationships. There can be no assurance that our management will be able to maintain such business relationships, or enter into or maintain new business contracts and other business relationships, on acceptable terms, if at all. The failure to maintain important business relationships could have a material adverse effect on our business, financial condition or results of operations.
We depend substantially on the success of our product candidate, OCR-002, and we may not successfully complete the development of OCR-002, obtain regulatory approval or successfully commercialize it.
Our business is substantially dependent on our ability to complete the development of, obtain regulatory approval for, and successfully commercialize OCR-002 for the treatment of hyperammonemia and associated hepatic encephalopathy, or HE, in patients with liver cirrhosis, acute liver failure and acute liver injury. The process to develop, obtain regulatory approval for and commercialize OCR-002 is long, complex and costly.
We have not submitted a new drug application, or NDA, or received regulatory approval to market for any of our product candidates in any jurisdiction. We have only limited experience in filing the applications necessary to gain regulatory approvals and expect to rely on consultants and third party contract research organizations to assist us in this process. Securing FDA approval requires the submission of extensive preclinical and clinical data, information about product manufacturing processes and inspection of facilities and supporting information to the U.S. Food and Drug Administration, or FDA, for each therapeutic indication to establish each product candidate's safety and efficacy. Our product candidates, and any future product candidates, may not be effective, may be only moderately effective or may prove to have undesirable or unintended side effects, toxicities or other characteristics that may preclude our obtaining regulatory approval or prevent or limit commercial use.
Our product candidates and the activities associated with their development and commercialization, including their testing, manufacture, safety, efficacy, recordkeeping, labeling, storage, approval, advertising, promotion, sale and distribution, are subject to comprehensive regulation by the FDA and other regulatory agencies in the United States and by comparable authorities in other countries. We are not permitted to market our product candidates in the United States until we receive approval of an NDA for the product candidate in a particular indication from the FDA. Failure to obtain regulatory marketing approval for a product candidate will prevent us from commercializing the product candidate, and our ability to generate revenue will be materially impaired.
The process of obtaining regulatory approvals is expensive, often takes many years, if approval is obtained at all, and can vary substantially based upon, among other things, the type, complexity and novelty of the product candidates involved. Changes in the regulatory approval policy during the development period, changes in or the enactment of

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additional statutes or regulations, or changes in regulatory review for a submitted product application, may cause delays in the approval or rejection of an application. Regulatory approval obtained in one jurisdiction does not necessarily mean that a product candidate will receive regulatory approval in all jurisdictions in which we may seek approval.
The FDA, EMA and other regulators have substantial discretion in the approval process and may form an opinion, after review of our data, that the new drug application, or NDA, is insufficient to allow approval of OCR-002 for either HE or acute liver failure. The FDA may require that we conduct additional clinical, nonclinical, manufacturing validation or drug product quality studies and submit such data before it will consider or reconsider the NDA. Depending on the extent of these or any other studies, approval of any applications that we submit may be delayed, or may require us to expend more resources than we have available. It is also possible that additional studies, if performed and completed, may not be considered sufficient by the FDA to approve the use of OCR-002 for either HE or acute liver failure. If any of these outcomes occur, we may not receive approval for OCR-002. Even if we obtain FDA approval for OCR-002, the approval might contain significant limitations related to use restrictions for certain age groups, warnings, precautions or contraindications, or may be subject to significant post-marketing studies or risk mitigation requirements. If we are unable to successfully commercialize OCR-002, we may not be able to earn sufficient revenues to continue our business.
The ability to show a statistically significant reduction in the clinical severity of Hepatic Encephalopathy in our planned phase 2b and phase 3 studies highly depends on the efficacy of OCR-002.
To date, the clinical trials relating to OCR-002 have studied, as a primary endpoint, the ability of OCR-002 to reduce plasma ammonia in the patient population. While we believe that a reduction in patient's plasma ammonia levels is linked to our planned HE endpoint of a reduction in the clinical severity of Hepatic Encephalopathy, which we intend to use in our phase2b and phase 3 studies, the study results may not bear this out.
Any safety or efficacy concerns, or delays in enrollment, relating to the two externally sponsored phase 2a studies of OCR-002 may delay or prevent approval of OCR-002.
There are two externally sponsored phase 2a studies that are ongoing. A study of OCR-002 was initiated in patients with liver cirrhosis and upper GI bleeding. While, in an open label portion of the study, the first cohort of patients suggested that the drug is well tolerated and provides rapid and durable ammonia reduction within 36 hours of treatment, there can be no assurance that similar results will be demonstrated in the ongoing double-blind, placebo-controlled portion of the study designed to measure ammonia plasma concentration. If the results of this phase 2a study, which are currently planned for 2014, are not positive, we may need to spend additional time evaluating the results and our OCR-002 development plans.
The National Institutes of Health is funding a second phase 2a study of OCR-002, the Acute Liver Failure Study Group, for the treatment of patients with acute liver injury, as well as those that have progressed to acute liver failure following acetaminophen overdose. Enrollment in this clinical trial is ongoing. In March 2013, the FDA approved less restrictive enrollment inclusion criteria for the study, which we believe will allow for a somewhat more rapid enrollment of patients. However, there can be no assurance that enrollment will occur on a timely basis or that the study will ever achieve full enrollment. In the event that safety or efficacy concerns are raised by this study, we may no longer be able to pursue an acute liver failure indication for OCR-002.
The patient populations suffering from both HE and acute liver failure are small. If we are unable to timely enroll our clinical trials or reach the desired enrollment levels, our development program for OCR-002 will likely be delayed.
We estimate that in the United States, the annual number of hospitalizations due to HE is approximately 150,000 cases, and the annual number of hospitalizations due to acute liver failure is approximately 2,000-3,000. To date, the largest clinical trial studying OCR-002 involved approximately 77 patients. We currently plan to enroll substantially greater numbers of patients in our anticipated phase 2b study and, if the phase 2b study is successful, our future phase 3 studies. If the enrollment in these studies is delayed, it will result in delays in our OCR-002 development program and the time to commercialization.
To obtain regulatory approval to market OCR-002 in additional indications and formulations, additional costly and lengthy clinical studies will be required, and the results are uncertain.
As part of the regulatory approval process, we will conduct, at our own expense, nonclinical and clinical studies for each indication and formulation that we intend to pursue. We expect the number of nonclinical and clinical studies that the regulatory authorities will require will vary. Generally, the number and size of clinical trials required for approval depends on the nature of the disease and size of the expected patient population that may be treated with a drug. We may need to perform additional nonclinical and clinical studies, which could result in delays in our ability to market OCR-002 for any additional indications, or in additional formulations.
Serious adverse events or other safety risks could require us to abandon development and preclude or limit approval of OCR-002 to treat HE or acute liver failure.

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We may voluntarily suspend or terminate our clinical trials if at any time we believe that they present an unacceptable risk to participants or if preliminary data demonstrates that one of our product candidates is unlikely to receive regulatory approval or unlikely to be successfully commercialized. In addition, regulatory agencies, institutional review boards or data safety monitoring boards may at any time order the temporary or permanent discontinuation of our clinical trials or request that we cease using investigators in the clinical trials if they believe that the clinical trials are not being conducted in accordance with applicable regulatory requirements, or that they present an unacceptable safety risk to participants. If we elect or are forced to suspend or terminate a clinical trial of OCR-002 to treat HE or acute liver failure, the commercial prospects for OCR-002 will be harmed and our ability to generate product revenues from OCR-002 may be delayed or eliminated.
Even though we have received orphan drug designation, we may not receive orphan drug exclusivity for OCR-002.
As part of our business strategy, we have obtained orphan drug designation in the United States for OCR-002 for the treatment of both HE and acute liver failure. We have also obtained orphan drug designation in the European Union for OCR-002 for the treatment of acute liver failure and are planning to submit such a request for the HE indication in the near future. In the United States, the company that first obtains FDA approval for a designated orphan drug for the specified rare disease or condition receives orphan drug marketing exclusivity for that drug for a period of seven years. This orphan drug exclusivity prevents the FDA from approving another application, including a full NDA, to market the same drug for the same orphan indication, except in very limited circumstances, including when the FDA concludes that the later drug is safer, more effective or makes a major contribution to patient care. For purposes of small molecule drugs, the FDA defines "same drug" as a drug that contains the same active chemical entity and is intended for the same use as the drug in question. To obtain orphan drug exclusivity for a drug that shares the same active chemical entity as an already orphan designated drug, it must be demonstrated to the FDA that the drug is safer or more effective than the approved orphan designated drug, or that it makes a major contribution to patient care. In addition, a designated orphan drug may not receive orphan drug exclusivity if it is approved for a use that is broader than the indication for which it received orphan designation. In addition, orphan drug exclusive marketing rights in the United States may be lost if the FDA later determines that the request for designation was materially defective or if the manufacturer is unable to assure sufficient quantity of the drug to meet the needs of patients with the rare disease or condition.
Even if we obtain orphan drug exclusivity for OCR-002, that exclusivity may not effectively protect the product from competition because different drugs can be approved for the same condition.
Even if the FDA approves OCR-002 in the United States, we may never obtain approval for or commercialize OCR-002 outside of the United States, which would limit our ability to realize our full market potential.
In order to market OCR-002 outside of the United States, we must comply with the regulatory requirements of, and obtain the required regulatory approvals in, other countries. Clinical trials conducted in one country may not be accepted by the regulatory authorities in other countries, and obtaining regulatory approval in one country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could require additional nonclinical studies or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from country to country and could delay or prevent the introduction of OCR-002 in those countries. If we fail to comply with regulatory requirements in international markets or to obtain and maintain required approvals or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full market potential of our products will be harmed.
Our future growth depends, in part, on our ability to penetrate foreign markets, where we are subject to additional regulatory burdens and other risks and uncertainties. However, we have limited experience marketing and servicing our products outside North America.
Our future profitability will depend, in part, on our ability to grow and ultimately maintain our sales in foreign markets. We may rely on third parties to support our foreign operations.
Any foreign operations we establish in the future subject us to additional risks and uncertainties, including:
our customers' ability to obtain reimbursement for procedures using our products in foreign markets;
our inability to directly control commercial activities because we are relying on third parties who may not put the same priority on our products as we would;
the burden of complying with complex and changing foreign regulatory, tax, accounting and legal requirements;

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different medical practices and customs in foreign countries affecting acceptance in the marketplace;
import or export licensing requirements;
longer accounts receivable collection times;
longer lead times for shipping;
language barriers for technical training;
reduced protection of intellectual property rights in some foreign countries;
foreign currency exchange rate fluctuations; and
the interpretation of contractual provisions governed by foreign laws in the event of a contract dispute.
Foreign sales of our products could also be adversely affected by the imposition of governmental controls, political and economic instability, trade restrictions, changes in tariffs and difficulties in staffing and managing foreign operations .
If we obtain approval to commercialize OCR-002 outside of the United States, a variety of risks associated with international operations could materially adversely affect our business.
If OCR-002 is approved outside the United States, we will likely enter into agreements with third parties to commercialize and distribute OCR-002 outside the United States. We expect that we will be subject to additional risks related to entering into or maintaining these international business relationships, including:

different regulatory requirements for drug approvals in foreign countries;
differing U.S. and foreign drug import and export rules;
reduced protection for intellectual property rights in foreign countries;
unexpected changes in tariffs, trade barriers and regulatory requirements;
different reimbursement systems;
economic weakness, including inflation, or political instability in particular foreign economies and markets;
compliance with tax, employment, immigration and labor laws for employees living or traveling abroad;
foreign taxes, including withholding of payroll taxes;
foreign currency fluctuations, which could result in increased operating expenses and reduced revenues, and other obligations incident to doing business in another country;
workforce uncertainty in countries where labor unrest is more common than in the United States;
production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad;
potential liability resulting from development work conducted by these distributors; and
business interruptions resulting from geopolitical actions, including war and terrorism, or natural disasters.
Our products and product candidates are subject to extensive regulatory requirements.

Even if a drug is FDA-approved, regulatory requirements still impose significant restrictions on a product's indicated uses and marketing and the FDA may impose ongoing requirements for potentially costly post-marketing studies. Furthermore, any new legislation addressing drug safety issues could result in delays or increased costs to assure compliance.
OCR-002, if approved, will be subject to ongoing regulatory requirements for labeling, packaging, storage, advertising, promotion, sampling, record-keeping and submission of safety and other post-market information, including both federal and state requirements in any jurisdiction in which we or a partner commercialize the product. In addition, manufacturers and their facilities are required to comply with extensive FDA requirements, including ensuring that quality control and manufacturing procedures conform to current Good Manufacturing Practices, or cGMP. As such, we and our contract manufacturers are subject to continual review and periodic inspections to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. We will also be required to report certain adverse reactions and production problems, if any, to the FDA and applicable foreign regulatory bodies, and to comply with

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requirements concerning advertising and promotion for our products. Promotional communications with respect to prescription drugs are subject to a variety of legal and regulatory restrictions and must be consistent with the information in the product's approved label. As such, we may not promote our products for indications or uses for which we do not have FDA or foreign approval, as applicable.
If a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, or disagrees with the promotion, marketing, or labeling of a product, a regulatory agency may impose restrictions on that product, including requiring withdrawal of the product from the market. If we fail to comply with applicable regulatory requirements, a regulatory agency or enforcement authority may:
issue warning letters;
impose civil or criminal penalties;
suspend regulatory approval;
suspend any of our ongoing clinical trials;
refuse to approve pending applications or supplements to approved applications submitted by us;
impose restrictions on our operations, including closing our contract manufacturers' facilities; or
seize or detain products or require a product recall.

Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability to commercialize and generate revenues from OCR-002, if approved. If regulatory sanctions are applied or if regulatory approval is withdrawn, the value of our company and our operating results will be adversely affected. Additionally, if we are unable to generate revenues from the sale of OCR-002, if approved, our potential for achieving profitability will be diminished and the capital necessary to fund our operations will be increased.
Any product for which we obtain marketing approval could be subject to restrictions or withdrawal from the market and we may be subject to penalties if we fail to comply with regulatory requirements or if we experience unanticipated problems with our product candidates, when and if any of them are approved.
Even if U.S. regulatory approval is obtained, the FDA may still impose significant restrictions on a product's indicated uses or marketing or impose ongoing requirements for potentially costly and time consuming post-approval studies, post-market surveillance or clinical trials. Our product candidates will also be subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance, advertising, promotion, recordkeeping and reporting of safety and other post-market information. In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with cGMP requirements relating to quality control, quality assurance and corresponding maintenance of records and documents. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requesting recall or withdrawal of the product from the market or suspension of manufacturing.
If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may:
issue warning letters or untitled letters;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve pending applications or supplements or applications filed by us;
suspend or impose restrictions on operations, including costly new manufacturing requirements; or
seize or detain products, refuse to permit the import or export of product, or request us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and

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generate revenue. 
The FDA has the authority to require a risk evaluation and mitigation strategy plan as part of an NDA or after approval, which may impose further requirements or restrictions on the distribution or use of an approved drug, such as limiting prescribing to certain physicians or medical centers that have undergone specialized training, limiting treatment to patients who meet certain safe-use criteria and requiring treated patients to enroll in a registry.
In addition, if any of our product candidates are approved, our product labeling, advertising and promotion would be subject to regulatory requirements and continuing regulatory review. The FDA strictly regulates the promotional claims that may be made about prescription products. In particular, a product may not be promoted for uses that are not approved by the FDA as reflected in the product's approved labeling. If we receive marketing approval for our product candidates, physicians may nevertheless prescribe our products to their patients in a manner that is inconsistent with the approved label. If we are found to have promoted such off-label uses, we may become subject to significant liability. The FDA and other agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses, and a company that is found to have improperly promoted off-label uses may be subject to significant sanctions. The federal government has levied large civil and criminal fines against companies for alleged improper promotion and has enjoined several companies from engaging in off-label promotion. The FDA has also requested that companies enter into consent decrees or permanent injunctions under which specified promotional conduct is changed or curtailed.
Recently enacted and future legislation may increase the difficulty and cost for us to obtain marketing approval of and commercialize our product candidates and affect the prices we may obtain.
  In the United States and some foreign jurisdictions, there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare system that could prevent or delay marketing approval for our product candidates, restrict or regulate post-approval activities and affect our ability to profitably sell any of our product candidates for which we obtain marketing approval.
Legislative and regulatory proposals have been made to expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or interpretations will be changed, or what the impact of such changes on the marketing approvals of our product candidates, if any, may be. In addition, increased scrutiny by the U.S. Congress of the FDA's approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and post-marketing testing and other requirements. 
In the United States, the Medicare Modernization Act or MMA, changed the way Medicare covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class. As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in payments from private payors. 
In March 2010, President Obama signed into law the Health Care Reform Law, a sweeping law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on the health industry and impose additional health policy reforms. Effective October 1, 2010, the Health Care Reform Law revised the definition of “average manufacturer price” for reporting purposes, which could increase the amount of Medicaid drug rebates to states. Further, the new law imposed a significant annual fee on companies that manufacture or import branded prescription drug products. Substantial new provisions affecting compliance have also been enacted, which may require us to modify our business practices with healthcare practitioners. We will not know the full effects of the Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.
If our competitors are able to develop and market products that are preferred over OCR-002, our commercial opportunity for such product candidate will be reduced.


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We face competition from established pharmaceutical and biotechnology companies, as well as from academic institutions, government agencies and private and public research institutions, which may in the future develop products to treat HE, acute liver failure and irritable bowel syndrome. Even if we complete development, obtain regulatory approval and commercialize OCR-002 to treat HE in chronic patient population in oral formulation, we will face competition from Salix Pharmaceuticals, Inc., the manufacturer of rifaximin, as well as generic manufacturers of lactulose. Additionally, Hyperion Therapeutics has announced its intent to develop HPN-100 (Ravicti™), currently approved for the treatment of Urea Cycle Disorder, for the treatment of HE, which we expect to compete with OCR-002. In addition, researchers are continually learning more about liver disease including HE, and new discoveries may lead to new therapies. As a result, OCR-002 may be rendered less competitive. Other early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies.

Our commercial opportunity will be reduced if our competitors develop and commercialize products that are safer, more effective, have fewer side effects, are more convenient or are less expensive than OCR-002. We expect that our ability to compete effectively will depend upon, among other things, our ability to:
successfully and rapidly complete clinical trials and obtain all required regulatory approvals in a timely and cost- effective manner;
maintain patent protection for OCR-002 and otherwise prevent the introduction of generics of OCR-002;
attract and retain key personnel;
build an adequate sales and marketing infrastructure;
obtain adequate reimbursement from third-party payors; and
maintain positive relationships with patient advocacy groups.
The commercial success of OCR-002 will depend upon the degree of market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community. If we fail to achieve market acceptance of OCR-002, our revenue will be more limited and it will be more difficult to achieve profitability.

OCR-002 may not gain sufficient market acceptance among physicians, patients, patient advocacy groups, health care payors and the medical community and our business may suffer. The degree of market acceptance of OCR-002 will depend on a number of factors, including:
the effectiveness of such products as compared to other products pertaining to their respective indications;
the prevalence and severity of any side effects;
the market price and patient out-of-pocket costs of the product relative to other treatment options, including any generics;
relative convenience and ease of administration;
willingness by patients to stop using current treatments and adopt a new treatment;
restrictions on healthcare provider prescribing of and patient access to our products due to a Risk Evaluation
Mitigation Strategy, or REMS;
the strength of our marketing and distribution organizations;
the quality of our relationship with patient advocacy groups; and
sufficient third-party coverage or reimbursement.

If we fail to obtain and sustain an adequate level of reimbursement for our products by third-party payors, our sales, revenue and gross margins would be adversely affected, and we may not find it commercially viable. Third-party payors, such as government or private health care insurers, carefully review and increasingly question the coverage of, and challenge the prices charged for, drugs. Reimbursement rates from private health insurance companies vary depending on the company, the insurance plan and other factors. A current trend in the United States health care industry is toward cost containment. Large public and private payors, managed care organizations, group purchasing organizations and similar organizations are exerting increasing influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including Medicare, are questioning the coverage of, and challenging the prices charged for, medical products and services, and many third-party payors limit coverage of or reimbursement for newly approved health care products. In particular, third-party payors may limit the covered indications. Cost-control

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initiatives could decrease the price we might establish for products, which could result in product revenues being lower than anticipated. If the prices for our products decrease or if governmental and other third-party payors do not provide adequate coverage and reimbursement levels, our revenue and prospects for profitability will suffer. Reimbursement systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country basis.

Reimbursement in the European Union must be negotiated on a country-by-country basis and in many countries the product cannot be commercially launched until reimbursement is approved. The negotiation process in some countries can exceed 12 months.

If we are unable to establish a direct sales force for OCR-002 in the United States, our business may be harmed.

We currently do not have an established sales organization. If OCR-002 is approved by the FDA for commercial sale, we may market OCR-002 directly to physicians in the United States through our own sales force. We will need to incur significant additional expenses and commit significant additional management resources to establish and train a sales force to market and sell OCR-002. We may not be able to successfully establish these capabilities despite these additional expenditures. We will also have to compete with other pharmaceutical and life sciences companies to recruit, hire, train and retain sales and marketing personnel. In the event we are unable to successfully market and promote OCR-002, our business may be harmed.

We are evaluating strategic options for AST-120. If we are unable to establish and implement an appropriate plan, we will not receive any revenues and may be required to return the product to the licensor.

In March 2012, we received a CE Mark for the sale of AST-120 as a medical device for the treatment of diarrhea predominant irritable bowel syndrome (IBS) in the European Market. However, we have not commercialized AST-120 and, as a result, we have not generated any revenue from the sale of AST-120. We are currently evaluating our options for AST-120. If we are unable to determine and implement an appropriate strategic plan for AST-120, we will not receive any revenue in relation to this product. Furthermore, if we do not make commercially reasonable efforts to develop and commercialize AST-120, the license agreement may be terminated and all rights to AST-120 may revert to the licensor.

If we fail to establish an effective distribution process utilizing specialty pharmacies, our business could suffer materially and our stock price could decline.

We do not currently have the infrastructure necessary for distributing pharmaceutical products to patients. We intend to contract with a third-party logistics company to warehouse these products and distribute them to specialty pharmacies. A specialty pharmacy is a pharmacy that specializes in the dispensing of medications for complex or chronic conditions which require a high level of patient education and ongoing management. This distribution network will require significant coordination with our sales and marketing and finance organizations. Failure to secure contracts with a logistics company and specialty pharmacies could negatively impact the distribution of our products, and failure to coordinate financial systems could negatively impact its ability to accurately report product revenue. If we are unable to effectively establish and manage the distribution process, the commercial launch and sales of our products will be delayed or severely compromised and our results of operations may be harmed.
In addition, the use of specialty pharmacies involves certain risks, including, but not limited to, risks that these specialty pharmacies will:
not provide us with accurate or timely information regarding their inventories, the number of patients who are using our products, or complaints regarding our products;
not effectively sell or support our products;
reduce their efforts or discontinue to sell or support our products;
not devote the resources necessary to sell our products in the volumes and within the time frames that we expect;
not comply with any requirements imposed on pharmacies through REMS;
be unable to satisfy financial obligations to us; or
cease operations.

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Any such failure may result in decreased product sales and lower product revenue, which would harm our business.
If our strategic partner fails to perform its obligations under our agreement, the development and commercialization of the product candidates under such agreement could be delayed or terminated and our business could be substantially harmed.
We entered into a strategic collaboration with Bristol-Myers Squibb Company, or BMS, primarily focused on the identification and optimization of novel drug compounds for certain targets of interest to BMS. The research portion of the collaboration was completed in December 2012 and we transferred compounds to BMS for further development across multiple drug targets. BMS has primary responsibility for optimizing the identified lead compounds, and sole responsibility for completing preclinical and clinical development of all products arising from the collaboration, and for their commercialization globally. Total milestone payments to us under the agreement, excluding royalties and sales milestones, could reach up to approximately $80 million for each target program. However, this strategic partnership may not be scientifically or commercially successful due to a number of important factors, including the following:

BMS has significant discretion in determining the efforts and resources that they will apply to their strategic relationship with us. The timing and amount of any cash payments, milestones and royalties that we may receive under such agreements will depend on, among other things, the efforts, allocation of resources and successful development and commercialization of any product candidates by BMS under its agreement.

Our agreement with BMS provides it with wide discretion in deciding which novel compounds to advance through the clinical development process. It is possible for BMS to reject certain compounds at any point in the research, development and clinical trial process without triggering a termination of their agreement with us. In the event of any such decision, our business and prospects may be adversely affected due to our inability to progress such compounds ourselves.

BMS may develop and commercialize, either alone or with others, or be acquired by a company that has products that are similar to or competitive with the product candidates that it licenses from us.

BMS may change the focus of its development and commercialization efforts or pursue higher-priority programs.

BMS has, under certain circumstances, the first right to maintain or defend our intellectual property rights licensed to it, and, although we may have the right to assume the maintenance and defense of our intellectual property rights if our strategic partner does not, our ability to do so may be compromised by our strategic partner's acts or omissions.

BMS may utilize our intellectual property rights in such a way as to invite litigation that could jeopardize or invalidate our intellectual property rights or expose us to potential liability.

BMS may not comply with all applicable regulatory requirements, or fail to report safety data in accordance with all applicable regulatory requirements.
If BMS fails to develop or effectively commercialize novel compounds for any of the foregoing reasons, we may not be able to replace the strategic partner with another partner. We may also be unable to obtain, on terms acceptable to us, a license from such strategic partner to any of its intellectual property that may be necessary or useful for us to continue to develop and commercialize a product candidate. Any of these events could have a material adverse effect on our business, results of operations and our ability to achieve future profitability, and could cause our stock price to decline.

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If we fail to attract and retain senior management and key scientific personnel, we may be unable to successfully develop our product candidates, conduct clinical trials and commercialize our product candidates.
      Our success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical and scientific personnel. We are highly dependent upon our senior management, as well as other senior scientists and members of our management team. The loss of services of any of these individuals or one or more of our other members of senior management could delay or prevent the successful development of our product pipeline or the commercialization of our product candidates. We need to hire and retain qualified personnel for the development, manufacture and commercialization of drugs. We could experience problems in the future attracting and retaining qualified employees. For example, competition for qualified personnel in the biotechnology and pharmaceuticals field is intense. We may not be able to attract and retain quality personnel on acceptable terms who have the expertise we need to sustain and grow our business.
If we are found in violation of federal or state "fraud and abuse" laws, we may be required to pay a penalty and/or be suspended from participation in federal or state health care programs, which may adversely affect our business, financial condition and results of operation.
In the United States, we are subject to various federal and state health care "fraud and abuse" laws, including anti- kickback laws, false claims laws and other laws intended to reduce fraud and abuse in federal and state health care programs. The federal Anti-Kickback Statute makes it illegal for any person, including a prescription drug manufacturer (or a party acting on its behalf), to knowingly and willfully solicit, receive, offer or pay any remuneration that is intended to induce the referral of business, including the purchase, order or prescription of a particular drug for which payment may be made under a federal health care program, such as Medicare or Medicaid. Under federal government regulations, some arrangements, known as safe harbors, are deemed not to violate the federal Anti-Kickback Statute. Although we seek to structure our business arrangements in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal Anti-Kickback Statute. False claims laws prohibit anyone from knowingly and willfully presenting or causing to be presented for payment to third-party payors, including government payors, claims for reimbursed drugs or services that are false or fraudulent, claims for items or services that we are not provided as claimed, or claims for medically unnecessary items or services. Cases have been brought under false claims laws alleging that off-label promotion of pharmaceutical products or the provision of kickbacks has resulted in the submission of false claims to governmental health care programs. Under the Health Insurance Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any health care benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services. Violations of fraud and abuse laws may be punishable by criminal and/ or civil sanctions, including fines and/or exclusion or suspension from federal and state health care programs such as Medicare and Medicaid and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Many states have adopted laws similar to the federal anti-kickback statute, some of which apply to the referral of patients for health care services reimbursed by any source, not just governmental payors. In addition, California and a few other states have passed laws that require pharmaceutical companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers and/or the Pharmaceutical Research and Manufacturers of America, Code on Interactions with Healthcare Professionals. In addition, several states impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement we could be subject to penalties.
Neither the government nor the courts have provided definitive guidance on the application of fraud and abuse laws to our business. Law enforcement authorities are increasingly focused on enforcing these laws, and it is possible that some of its practices may be challenged under these laws. While we believe we has structured our business arrangements to comply with these laws, it is possible that the government could allege violations of, or convict us of violating, these laws. If we are found in violation of one of these laws, we could be required to pay a penalty and could be suspended or excluded from participation in federal or state health care programs, and our business, financial condition and results of operations may be adversely affected.
Risks Related to Our Financial Position and Need for Additional Capital
We anticipate that we will continue to incur net losses for the foreseeable future.

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We anticipate that a substantial portion of our capital resources and efforts in the foreseeable future will be focused on completing the development and obtaining regulatory approval of OCR-002. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses have had and will continue to have an adverse effect on stockholders' deficit and working capital.
If we fail to obtain the capital necessary to fund our operations, we will be unable to successfully develop and commercialize our most advanced product candidates.
We will need to obtain additional financing to fund future operations, including the development and commercialization of OCR-002 and to support sales and marketing activities. Moreover, our fixed expenses such as rent, license payments, interest expense and other contractual commitments are substantial and are expected to increase in the future.
Our future funding requirements will depend on many factors, including, but not limited to:
the initiation, progress, timing, scope and costs of our nonclinical studies and clinical trials, including the ability to timely enroll patients in our planned and potential future clinical trials;
the time and cost necessary to obtain regulatory approvals;
the costs of manufacture clinical and commercial supplies of our product candidates, including OCR-002;
payments of milestones and royalties to third parties;
the costs and timing of establishing sales and marketing capabilities in selected markets;
the terms and timing of establishing collaborations, license agreements and other partnerships on terms favorable to us;
the time and cost necessary to respond to technological and market developments;
the costs of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; and
any changes made to, or new developments in, our restated collaboration agreement with UCL Business PLC or
Kureha Corporation or any new collaborative, licensing and other commercial relationships that we may establish.
We have not generated any revenue from the sale of any products and do not know when, or if, we will generate any revenue. Until we can generate a sufficient amount of revenue, we may raise additional funds through collaborations and public or private debt or equity financings. Additional funds may not be available when needed on terms that are acceptable, or at all. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest of existing stockholders will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of existing stockholders. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring debt, making capital expenditures or declaring dividends. We may seek to access the public or private capital markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.
We believe that our current cash and cash equivalents will be sufficient to fund our anticipated operating requirements through at least the next twelve months. This estimate is based on a number of assumptions that may prove wrong, and changing circumstances beyond our control may cause the consumption of capital more rapidly than currently anticipated. Inability to obtain funding when needed could seriously harm the business.
Our future financial results could be adversely impacted by asset impairments or other charges.
Applicable accounting standards requires that we test assets determined to have long lives for impairment on an annual, or on an interim basis if certain events occur or circumstances change that would reduce the fair value of an asset below its carrying value. In addition, long-lived assets with finite lives are tested for impairment whenever events or changes in circumstances indicate that its carrying value may not be recoverable. A significant decrease in the fair value of a long-lived asset, an adverse change in the extent or manner in which a long-lived asset is being used or in its physical

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condition or an expectation that a long-lived asset will be sold or disposed of significantly before the end of its previously estimated life are among several of the factors that could result in an impairment charge. We intend to evaluate the carrying value of our assets to determine if the merger and private placement indicate that the carrying amounts of such assets may not be recoverable. Such a review could result in an impairment charge, which could have a negative impact on our results of operations and financial position, as well as on the market price of our common stock.
Risks Related to Our Reliance on Third Parties
We have no manufacturing capacity and anticipate continued reliance on third-party manufacturers for the development and commercialization of our products.
We do not currently operate manufacturing facilities for clinical or commercial production of any product. We have no experience in drug formulation, and we lack the resources and the capabilities to manufacture OCR-002 on a clinical or commercial scale. We do not intend to develop facilities for the manufacture of products for clinical trials or commercial purposes in the foreseeable future. We rely on third-party manufacturers to produce bulk drug substance and drug products required for our clinical trials. We plan to continue to rely upon contract manufacturers and, potentially, collaboration partners to manufacture commercial quantities of our drug product candidates if and when approved for marketing by the applicable regulatory authorities. We have clinical supplies of the active pharmaceutical ingredient for OCR-002 manufactured for us by a single drug substance supplier Helsinn Chemicals SA. The OCR-002 finished product manufacturing and filling is undertaken by AAI Pharma Service Corp. on our behalf. We have not secured commercial supply agreements with any contract manufacturers and can give no assurance that we will enter commercial supply agreements with any contract manufacturers on favorable terms or at all. Our contract manufacturers' failure to achieve and maintain high manufacturing standards, in accordance with applicable regulatory requirements, or the incidence of manufacturing errors, could result in patient injury or death, product shortages, product recalls or withdrawals, delays or failures in product testing or delivery, cost overruns or other problems that could seriously harm our business. Contract manufacturers often encounter difficulties involving production yields, quality control and quality assurance, as well as shortages of qualified personnel.
Our existing manufacturer and any future contract manufacturers may not perform as agreed or may not remain in the contract manufacturing business. In the event of a natural disaster, business failure, strike or other difficulty, we may be unable to replace a third-party manufacturer in a timely manner and the production of our products would be interrupted, resulting in delays and additional costs.
Some of the intellectual property necessary for the commercialization of our products is or will be licensed from third parties, which will require us to pay milestones and royalties.
We have a license agreement on OCR-002 with UCL Business PLC for worldwide rights to develop and commercialize our product candidate and related technologies for any use. We may be required to make future milestone payments totaling up to $17.0 million upon the achievement of various milestones related to regulatory or commercial events for OCR-002. We may also be required to pay incremental milestone payments for an additional dosage form. We are also obligated to pay a royalty in the low to mid-single digits on future net sales of the licensed product.
We have also in-licensed from Kureha Corporation the technology and exclusive development and commercialization rights to the AST-120 product candidate for the treatment of liver and gastrointestinal disease for the territories worldwide outside of certain Asian countries. We are required to make future milestone payments upon the achievement of various milestones related to regulatory or commercial events for the first indications in gastrointestinal diseases. We are also obligated to pay a royalty in the single digits on future net sales. In April 2012, we amended the license agreement to include the development and commercialization of AST-120 as a medical device for IBS in European countries. Under this amended agreement, we may be required to make milestone payments based on future commercial milestones and net sales.
We may become obligated to make a milestone or royalty payments when we do not have the cash on hand to make these payments or have budgeted cash for our development efforts. This could cause us to delay our development efforts, curtail our operations, scale back our commercialization and marketing efforts or seek additional capital to meet these obligations, which could be on terms unfavorable to us. Additionally, if we fail to make a required payment and do not cure the failure within the required time period, the licensor may be able to terminate our license to use the licensed technology. If our license from UCL Business PLC or Kureha is terminated, it will likely be impossible for us to commercialize OCR-002 or AST-120, respectively.
We currently depend on third parties to conduct some of the operations of our clinical trials and on a single

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third-party to supply OCR-002 for our clinical uses in connection with the development of, and application for regulatory approval of, such product candidate.
We rely on third parties, such as contract research organizations, medical institutions, clinical investigators and contract laboratories to oversee some of the operations of our clinical trials and to perform data collection and analysis. As a result, we may face additional delays outside of our control if these parties do not perform their obligations in a timely fashion or in accordance with regulatory requirements. If these third parties do not successfully carry out their contractual duties or obligations and meet expected deadlines, if they need to be replaced, or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or for other reasons, our financial results and the commercial prospects for OCR-002 or our other potential product candidates could be harmed, our costs could increase and our ability to obtain regulatory approval and commence product sales could be delayed.
Risks Related to Product Liability
If product liability lawsuits are successfully brought against us, we will incur substantial liabilities and may be required to limit the commercialization of OCR-002 or other products.
We face an inherent risk of product liability as a result of the clinical testing of our product candidates and will face an even greater risk if we commercialize any products. For example, we may be sued if any product we develop allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers inherent in the product, negligence, strict liability and a breach of warranties. Claims could also be asserted under state consumer protection acts. If we cannot successfully defend ourselves against product liability claims, we may incur substantial liabilities or be required to limit commercialization of our product candidates. Even successful defense would require significant financial and management resources. Regardless of the merits or eventual outcome, liability claims may result in:
decreased demand for our product candidates or products that we may develop;
injury to our reputation;
withdrawal of clinical trial participants;
costs to defend the related litigation;
a diversion of management's time and our resources;
substantial monetary awards to trial participants or patients;
product recalls, withdrawals or labeling, marketing or promotional restrictions;
loss of revenue;
the inability to commercialize our product candidates; and
a decline in our stock price.
In addition, while we continue to take what we believes are appropriate precautions, we may be unable to avoid significant liability if any product liability lawsuit is brought against us.
If product liability lawsuits are successfully brought against us, our insurance may be inadequate.
We are exposed to the potential product liability risks inherent in the testing, manufacturing and marketing of human pharmaceuticals. We plan to maintain insurance against product liability lawsuits for commercial sale of OCR-002, if approved for sale. We currently maintain insurance for the clinical trials of product candidates. Biopharmaceutical companies must balance the cost of insurance with the level of coverage based on estimates of potential liability. Historically, the potential liability associated with product liability lawsuits for pharmaceutical products has been unpredictable. Although we believe that our current insurance is a reasonable estimate of our potential liability and represents a commercially reasonable balancing of the level of coverage as compared to the cost of the insurance, we may be subject to claims in connection with clinical trials and commercial use of OCR-002 and other product candidates, for which existing insurance coverage may not be adequate.
The product liability insurance we will need to obtain in connection with the commercial sales of our product and product candidates, if and when they receive regulatory approval, may be unavailable in meaningful amounts or at a reasonable cost. If we are the subject of a successful product liability claim that exceeds the limits of any insurance coverage obtained, we may incur substantial charges that would adversely affect earnings and require the commitment of capital

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resources that might otherwise be available for the development and commercial launch of product programs.
Risks Related to Our Intellectual Property
We may not be able to protect our proprietary technology in the marketplace.
We place considerable importance on obtaining patent protection for new technologies, products and processes because our commercial success will depend, in part, on obtaining patent protection for new technologies, products and processes, successfully defending these patents against third-party challenges and successfully enforcing our patents against third party competitors. To that end, we file applications for patents covering compositions of matter or uses of our product candidates or our proprietary processes as well as other intellectual property important to our business.
Where appropriate, we seek patent protection for certain aspects of our technology. Patent protection may not be available for some of the products or technology we are developing. If we must spend significant time and money protecting or enforcing our patents, designing around patents held by others or licensing, potentially for large fees, patents or other proprietary rights held by others, our business and financial prospects may be harmed. We may not develop additional proprietary products which are patentable.
The patent positions of pharmaceutical and biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions. Accordingly, our patent applications may never be approved by U.S. or foreign patent offices and the patents and patent applications relating to our products, product candidates and technologies may be challenged, invalidated or circumvented by third parties and might not protect us against competitors with similar products or technologies. Publication of information related to OCR-002 and our future products and product candidates may prevent us from obtaining or enforcing patents relating to these products and product candidates, including without limitation composition-of- matter patents, which are generally believed to offer the strongest patent protection.
We own, or have licensed, patents in the United States and in certain foreign jurisdictions related to AST-120 and OCR-002. Patents that we own or license do not ensure the protection of our intellectual property for a number of reasons, including without limitation the following:
we may be required to disclaim part of the term of one or more patents;
there may be prior art of which we are not aware that may affect the validity or enforceability of a patent claim;
there may be prior art of which we are aware, which we do not believe affects the validity or enforceability of a patent claim, but which, nonetheless ultimately may be found to affect the validity or enforceability of a patent claim;
there may be other patents existing in the patent landscape for OCR-002 that will affect our freedom to operate;
if our patents are challenged, a court could determine that they are not valid or enforceable;
a court could determine that a competitor's technology or product does not infringe our patents; and
our patents could irretrievably lapse due to failure to pay fees or otherwise comply with regulations, or could be subject to compulsory licensing.
If we encounter delays in our development or clinical trials, the period of time during which we could market our products under patent protection would be reduced.
Others have filed, and in the future are likely to file, patent applications covering products and technologies that are similar, identical or competitive to ours, or important to our business. We cannot be certain that any patent application owned by a third party will not have priority over patent applications filed or in-licensed by us, or that we or our licensors will not be involved in interference, opposition or invalidity proceedings before U.S. or foreign patent offices. In addition, under the recently enacted America Invents Act of 2011, or AIA, the U.S. patent system, among other things, will transition from a first-to-invent to a first-to-file patent system, will increase the scope of prior art available for patentability and invalidity determinations, and will introduce new procedures, including post-grant review and inter parties review, for challenging U.S. patents once they have granted.  The various provisions of the AIA, once they become effective, may impact our ability to secure meaningful patent protection for inventions that we develop in the future.

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We also rely on trade secrets to protect technology in cases when we believe patent protection is not appropriate or obtainable. However, trade secrets are difficult to protect. While we require employees, academic collaborators, consultants and other contractors to enter into confidentiality agreements, we may not be able to adequately protect our trade secrets or other proprietary information. Our research collaborators and scientific advisors have rights to publish data and information in which we have rights. If we cannot maintain the confidentiality of our technology and other confidential information in connection with our collaborators and advisors, our ability to receive patent protection or protect our proprietary information may be imperiled.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to life sciences. This could make it difficult for us to stop the infringement of our in-licensed patents or the misappropriation of our other intellectual property rights. For example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. In addition, changes in the law and legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the enforcement of intellectual property.
We may infringe the intellectual property rights of others, which may prevent or delay our product development efforts and stop us from commercializing or increase the costs of commercializing our products.
Our commercial success depends significantly on our ability to operate without infringing the patents and other intellectual property rights of third parties. For example, there could be issued patents of which we are not aware that our products infringe. There also could be patents that we believe we do not infringe, but that we may ultimately be found to infringe. Moreover, patent applications are in some cases maintained in secrecy until patents are issued. The publication of discoveries in the scientific or patent literature frequently occurs substantially later than the date on which the underlying discoveries e made and patent applications we filed. Because patents can take many years to issue, there may be currently pending applications of which we are unaware that may later result in issued patents that our products infringe. For example, pending applications may exist that provide support or can be amended to provide support for a claim that results in an issued patent that our product infringes.
Third parties may assert that we are employing their proprietary technology without authorization. If a court held that any third-party patents are valid, enforceable and cover our products or their use, the holders of any of these patents may be able to block our ability to commercialize our products unless we obtained a license under the applicable patents, or until the patents expire. We may not be able to enter into licensing arrangements or make other arrangements at a reasonable cost or on reasonable terms. Any inability to secure licenses or alternative technology could result in delays in the introduction of our products or lead to prohibition of the manufacture or sale of products by us.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
Any lawsuits relating to infringement of intellectual property rights necessary to defend us or enforce our rights will be costly and time consuming.

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Our ability to defend our intellectual property may require us to initiate litigation to enforce our rights or defend our activities in response to alleged infringement of a third-party. In addition, we may be sued by others who hold intellectual property rights who claim that their issued patents are infringed by AST-120 or any future products, including OCR-002, or product candidates. These lawsuits can be very time consuming and costly. There is a substantial amount of litigation involving patent and other intellectual property rights in the biotechnology and pharmaceutical industries generally.
In addition, our patents and patent applications, or those of our licensors, could face other challenges, such as interference proceedings, opposition proceedings, and re-examination proceedings. Any of these challenges, if successful, could result in the invalidation of, or in a narrowing of the scope of, any of our patents and patent applications subject to challenge. Any of these challenges, regardless of their success, would likely be time consuming and expensive to defend and resolve and would divert our management's time and attention.
We may be subject to claims that we have wrongfully hired an employee from a competitor or that we or our employees have wrongfully used or disclosed alleged confidential information or trade secrets of their former employers.
As is commonplace in our industry, we employ individuals who were previously employed at other biotechnology or pharmaceutical companies, including our competitors or potential competitors. Although no claims against us are currently pending, we may be subject in the future to claims that our employees or prospective employees are subject to a continuing obligation to their former employers (such as non-competition or non-solicitation obligations) or claims that our employees or we have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. Litigation may be necessary to defend against these claims. Even if we are successful in defending against these claims, litigation could result in substantial costs and be a distraction to management.
If we do not obtain protection under the Hatch-Waxman Amendments and similar foreign legislation by extending the patent terms and obtaining data exclusivity for our product candidates, our business may be materially harmed.
Depending upon the timing, duration and specifics of FDA marketing approval of our product candidates, one or more of our U.S. patents may be eligible for limited patent term restoration under the Drug Price Competition and Patent Term Restoration Act of 1984, referred to as the Hatch-Waxman Amendments. The Hatch-Waxman Amendments permit a patent restoration term of up to five years as compensation for patent term lost during product development and the FDA regulatory review process. However, we may not be granted an extension because of, for example, failing to apply within applicable deadlines, failing to apply prior to expiration of relevant patents or otherwise failing to satisfy applicable requirements. Moreover, the applicable time period or the scope of patent protection afforded could be less than we request. If we are unable to obtain patent term extension or restoration or the term of any such extension is less than we request, our competitors may obtain approval of competing products following our patent expiration, and our revenue could be reduced, possibly materially.
Risks Related to Ownership of Our Capital Stock
Our principal stockholders, executive officers and directors own a significant percentage of our common stock and will be able to exert a significant control over matters submitted to the stockholders for approval.
Our officers and directors, and stockholders who own more than 5% of our common stock beneficially owns a significant percentage of our common stock. This significant concentration of share ownership may adversely affect the trading price for our common stock because investors often perceive disadvantages in owning stock in companies with controlling stockholders. These stockholders, if they acted together, could significantly influence all matters requiring approval by the stockholders, including the election of directors. The interests of these stockholders may not always coincide with the interests of other stockholders.
The trading price of the shares of our common stock could be highly volatile, and purchasers of our common stock could incur substantial losses.
Our stock price is likely to be volatile. The stock market in general and the market for biotechnology companies in particular have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. As a result of this volatility, investors may not be able to sell their common stock at or above the price at which it was purchased. The market price for our common stock may be influenced by many factors, including:
results of the development efforts involving our product candidates, those of our competitors or those of other companies in our market sector;

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regulatory developments in the United States and foreign countries;
variations in our financial results or those of companies that are perceived to be similar to us;
changes in the structure of healthcare payment systems, especially in light of current reforms to the U.S. healthcare system;
announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments;
market conditions in the pharmaceutical and biotechnology sectors and issuance of securities analysts' reports or recommendations;
sales of our stock by insiders and 5% stockholders;
general economic, industry and market conditions;
additions or departures of key personnel;
intellectual property, product liability or other litigation against us;
expiration or termination of our relationships with our collaborators; and
the other factors described in this “Risk Factors” section.
In addition, in the past, stockholders have initiated class action lawsuits against biotechnology and pharmaceutical companies following periods of volatility in the market prices of these companies' stock. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management's attention and resources, which could have a material adverse effect on our business, financial condition and results of operations.
Our quarterly operating results may fluctuate significantly.
We expect our operating results to be subject to quarterly fluctuations. Our net loss and other operating results will be affected by numerous factors, including:
variations in the level of expenses related to our development programs;
addition or termination of clinical trials;
any intellectual property infringement lawsuit in which we may become involved;
regulatory developments affecting our product candidates;
our execution of any collaborative, licensing or similar arrangements, and the timing of payments we may make or receive under these arrangements; and
the achievement and timing of milestone payments under our existing strategic partnership agreements.
 If our quarterly operating results fall below the expectations of investors or securities analysts, the price of our common stock could decline substantially. Furthermore, any quarterly fluctuations in our operating results may, in turn, cause the price of our stock to fluctuate substantially.
Our ability to use net operating loss and tax credit carryforwards and certain built-in losses to reduce future tax payments is limited by provisions of the Internal Revenue Code, and may be subject to further limitation as a result of the Merger and prior or future offerings of our stock.
Section 382 and 383 of the Internal Revenue Code of 1986, as amended, or the Code, contain rules that limit the ability of a company that undergoes an ownership change, which is generally any change in ownership of more than 50% of its stock over a three-year period, to utilize its net operating loss and tax credit carryforwards and certain built-in losses recognized in years after the ownership change. These rules generally operate by focusing on ownership changes involving stockholders owning directly or indirectly 5% or more of the stock of a company and any change in ownership arising from a new issuance of stock by the company. Generally, if an ownership change occurs, the yearly taxable income limitation on the use of net operating loss and tax credit carryforwards and certain built-in losses is equal to the product of the applicable long term tax exempt rate and the value of the company's stock immediately before the ownership change. We may be unable to offset future taxable income, if any, with losses, or our tax liability with credits, before such losses and credits expire and therefore would incur larger federal income tax liability.

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In addition, it is likely that Merger and the prior public offerings of our stock, either on a standalone bases or when combined with future transactions, will cause us to undergo one or more additional ownership changes. In that event, we generally would not be able to use our pre-change loss or credit carryovers or certain built-in losses prior to such ownership change to offset future taxable income in excess of the annual limitations imposed by Sections 382 and 383 and those attributes already subject to limitations as a result of our prior ownership changes may be subject to more stringent limitations.
Anti-takeover provisions in our charter documents and under Delaware law could make an acquisition of us, which may be beneficial to our stockholders, more difficult and may prevent attempts by our stockholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may delay or prevent an acquisition of us or a change in our management. These provisions include:
the prohibition on actions by written consent of our stockholders;
the limitation on who may call a special meeting of stockholders;
the establishment of advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon at stockholder meetings;
the ability of our board of directors to issue preferred stock without stockholder approval, which would increase the number of outstanding shares and could thwart a takeover attempt; and
the requirement of at least 75% of the outstanding common stock to amend any of the foregoing provisions.
 In addition, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law, which limits the ability of stockholders owning in excess of 15% of our outstanding voting stock to merge or combine with us. Although we believe these provisions collectively provide for an opportunity to obtain greater value for stockholders by requiring potential acquirers to negotiate with our board of directors, they would apply even if an offer rejected by our board were considered beneficial by some stockholders. In addition, these provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. 
We do not intend to pay dividends on our common stock and, consequently, your ability to achieve a return on your investment will depend on appreciation in the price of our common stock.
We have never declared or paid any cash dividend on our common stock and do not currently intend to do so for the foreseeable future. We currently anticipate that we will retain future earnings for the development, operation and expansion of our business and do not anticipate declaring or paying any cash dividends for the foreseeable future. Therefore, the success of an investment in shares of our common stock will depend upon any future appreciation in their value. There is no guarantee that shares of our common stock will appreciate in value or even maintain the price at which our stockholders have purchased their shares.
Future sales of our common stock may cause our stock price to decline.
If our existing stockholders sell, or indicate an intent to sell, substantial amounts of our common stock in the public market after legal restrictions lapse, the trading price of our common stock could decline significantly. Moreover, a relatively small number of our stockholders own large blocks of shares. We cannot predict the effect, if any, that public sales of these shares or the availability of these shares for sale will have on the market price of our common stock.
Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our ability to produce accurate financial statements and on our stock price.
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, we are required to furnish a report by our management on our internal control over financial reporting. The internal control report must contain (a) a statement of management's responsibility for establishing and maintaining adequate internal control over financial reporting, (b) a statement identifying the framework used by management to conduct the required evaluation of the effectiveness of our internal control over financial reporting, and (c) management's assessment of the effectiveness of our internal control over financial reporting as of the end of our most recent fiscal year, including a statement as to whether or not internal control over financial reporting

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is effective.
To achieve compliance with Section 404 within the prescribed period, we are engaged in a process to document and evaluate our internal control over financial reporting, which is both costly and challenging. In this regard, we will have dedicated internal resources, engaged outside consultants and adopted a detailed work plan to (a) assess and document the adequacy of internal control over financial reporting, (b) take steps to improve control processes where appropriate, (c) validate through testing that controls are functioning as documented, and (d) implement a continuous reporting and improvement process for internal control over financial reporting. Though smaller reporting companies are not required to have their external auditors test internal controls or provide an attestation report on internal control over financial reporting, management will still need to do its assessment and there is a risk that we will not be able to conclude within the prescribed time frame that our internal control over financial reporting is effective as required by Section 404. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of our financial statements.
If securities or industry analysts do not publish research or reports or publish unfavorable research or reports about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors. We have limited research coverage by securities and industry analysts and may not maintain such coverage or obtain research coverage by additional securities and industry analysts. If we do not maintain such existing coverage, and additional securities or industry analysts do not commence coverage of our company, the trading price for our stock would be negatively impacted. If one or more of the analysts who covers us downgrades our stock, our stock price would likely decline. If one or more of these analysts ceases to cover us or fails to regularly publish reports on us, interest in our stock could decrease, which could cause our stock price or trading volume to decline.
    
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
July 2013 Merger and Private Placement    
On July 15, 2013, we completed a business combination with Ocera Therapeutics, Inc., a privately held Delaware corporation developing novel therapeutics for liver diseases, or Ocera, in accordance with the terms of the Agreement and Plan of Merger and Reorganization, dated as of April 23, 2013, or the Merger Agreement, by and among us, Ocera and Terrapin Acquisition, Inc., a Delaware corporation and our newly-formed, wholly-owned subsidiary, or the Merger Subsidiary. Pursuant to the Merger Agreement, Merger Subsidiary merged with and into Ocera, with Ocera, renamed as Ocera Subsidiary, Inc., surviving the merger as our wholly-owned subsidiary, or the Merger. Immediately following the Merger, we changed the name of the company to “Ocera Therapeutics, Inc.”
In connection with the Merger, on July 15, 2013, we effected a 12-to-1 reverse stock of our outstanding common stock. As a result of the Merger and after giving effect to a 12-to-1 reverse stock split, each outstanding share of Ocera's common converted into the right to receive approximately 0.11969414 shares of our common stock. At the effective time of the Merger, each outstanding option to purchase Ocera's common stock and warrant to purchase Ocera's common stock was converted into an option or warrant to purchase our common stock. Each of Ocera's options and warrants were assumed by us in accordance with its terms. No fractional shares of our common stock were issued in connection with the Merger. Instead, Ocera stockholders received cash in lieu of any fractional shares of our common stock such stockholders would otherwise be entitled to receive in accordance with the Merger Agreement.

On April 23, 2013, concurrently with the execution of the Merger Agreement, we entered into a Securities Purchase Agreement, or the Financing Agreement, with certain existing Ocera stockholders and their affiliates. Pursuant to the Financing Agreement, immediately following the consummation of the Merger, we sold approximately $20 million in shares of our common stock, or the Financing, to the financing participants at a per share purchase price of $6.0264, representing the volume weighted average closing price of our common stock for the 10 trading days ending the day prior to the closing of the Merger. The Financing was consummated on July 15, 2013 pursuant to a private placement exempt from registration under Section 4(2) and Regulation D under the Securities Act of 1933, as amended, and the rules promulgated thereunder. Concurrently with the execution of the Financing Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the participants in the Financing.

The foregoing description of the Merger Agreement and the Financing Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement and the Financing Agreement, which were previously filed as Exhibit 2.1 and Exhibit 10.1, respectively, to the Form 8-K filed by us on April 29, 2013, and are incorporated herein by reference.

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November 2013 Private Placement

On November 8, 2013, we closed on a private placement financing contemplated by the Securities Purchase Agreement, or the Agreement, dated as of November 5, 2013 by and among the us and entities affiliated with Vivo Capital, Venrock, Deerfield Management, Great Point Partners, QVT Financial, RA Capital Management, InterWest Partners, Three Arch Opportunities Fund and certain other purchasers identified therein, or the Purchasers, pursuant to which we issued an aggregate of 3,940,887 units, or Units, for an aggregate purchase price of $28,000,000 in reliance upon exemptions from registration afforded by Section 4(2) of the Securities Act of 1933, as amended, and on Regulation D promulgated thereunder. Each Unit consisted of one share of our Common Stock and a warrant to acquire 0.20 shares of our Common Stock at an exercise price of $7.663 per share, or Warrants. The Units consist of an aggregate of 3,940,887 shares of Common Stock, or the Shares, and Warrants exercisable for an aggregate of 788,177 shares of our Common Stock, or the Warrant Shares. Concurrently with the execution of the Agreement, we entered into a Registration Rights Agreement that granted customary registration rights to the Purchasers. We are required to file a registration statement registering the resale of the Shares and Warrant Shares within 30 days of the closing.

The foregoing description of the Agreement, the Registration Rights Agreement and the Warrants is not complete and is qualified in its entirety by reference to the Agreement, Registration Rights Agreement and the Form of Warrant, which were previously filed as Exhibit 10.1, Exhibit 10.2 and Exhibit 4.1, respectively, to the Form 8-K filed by us on November 7, 2013, and are incorporated herein by reference.

Item 3. Defaults Upon Senior Securities
None.

Item 4. Mine Safety Disclosures
Not applicable.

Item 5. Other Information

None.

Item 6.    Exhibits
 
(a) Exhibits required by Item 601 of Regulation S-K.
 
Exhibit
Number
 
Description
 
 
 
3.1
 
Eighth Amended and Restated Certificate of Incorporation of the Company, as amended (Incorporated by reference to Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
 
 
 
3.2
 
Form of Amended and Restated Bylaws of the Company (Incorporated by reference to Exhibit 3.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
 
 
 
4.1
 
Specimen Common Stock Certificate ((Incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K, as filed on July 15, 2013).
 
 
 
4.2
 
Fourth Amended and Restated Registration Rights Agreement dated as of May 12, 2005 by and among the Company and the investors listed therein, as amended (Incorporated by reference to Exhibit 4.2 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
 
 
 
4.3
 
Registration Rights Agreement, dated as of April 23, 2013, by and among the Company and certain shareholders of Ocera Therapeutics, Inc. named therein (Incorporated by reference to Exhibit 10.2 of the Company's Current Report on Form 8-K, filed on April 29, 2013).
 
 
 
4.4
 
Registration Rights Agreement, dated as of November 5, 2013, by and among Ocera Therapeutics, Inc. and the Purchasers identified therein (Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on November 7, 2013).
 
 
 

50




4.5
 
Warrant to Purchase Stock dated December 3, 2008 issued by the Company to Oxford Finance Corporation (Incorporated by reference to Exhibit 4.3 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
 
 
 
4.6
 
Warrant to Purchase Stock dated December 3, 2008 issued by the Company to Silicon Valley Bank (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
 
 
 
4.7
 
Warrant to Purchase Stock dated September 30, 2010 issued by the Company to Compass Horizon Funding Company LLC (Incorporated by reference to Exhibit 4.5 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749)).
 
 
 
4.8
 
Warrant to Purchase Stock dated September 30, 2010 issued by the Company to Oxford Finance Corporation (Incorporated by reference to Exhibit 4.6 of the Company’s Registration Statement on Form S-1, as amended (File No. 333-170749).
 
 
 
4.9
 
Form of Warrant to Purchase Stock issued by the Company on January 31, 2012. (Incorporated by reference to Exhibit 4.1 to the Company's current report on Form 8-K, filed on February 1, 2012).
 
 
 
4.10
 
Form of Common Stock Purchase Warrants, dated March 30, 2012, issued by Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) (Incorporated by reference to Exhibit 4.8 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
 
 
 
4.11
 
Form of Common Stock Purchase Warrants, dated October 1, 2012, issued by Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) (Incorporated by reference to Exhibit 4.9 of the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013).
4.12
 
Form of Warrant (Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on November 7, 2013).
 
 
 
10.1#
 
Restated License Agreement by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and Kureha Corporation, dated as of March 6, 2008 (Incorporated by reference to Exhibit 10.1 the Company’s Current Report on Form 8-K/A filed on September 27, 2013).
 
 
 
10.2#
 
Agreement by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and Kureha Corporation, dated April 5, 2012 (Incorporated by reference to Exhibit 10.2 the Company’s Current Report on Form 8-K/A filed on September 27, 2013).
 
 
 
10.3#
 
Commercial Manufacture and Supply Agreement by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and Kureha Corporation, dated as of November 1, 2007 (Incorporated by reference to Exhibit 10.3 the Company’s Current Report on Form 8-K/A filed on September 27, 2013).
 
 
 
10.4#
 
Clinical Manufacture and Supply Agreement by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and Kureha Corporation, dated as of December 22, 2005 (Incorporated by reference to Exhibit 10.4 the Company’s Current Report on Form 8-K/A filed on September 27, 2013).
10.5#
 
Deed by and between Ocera Subsidiary, Inc. (f/k/a Ocera Therapeutics, Inc.) and UCL Business PLC, dated as of February 20, 2013, relating to and amending certain provisions of the Amended and Restated License Agreement by and between Ocera Subsidiary, Inc. and UCL Business PLC, dated as of July 26, 2011, a copy of which is attached to the Deed (Incorporated by reference to Exhibit 10.5 the Company’s Current Report on Form 8-K/A filed on September 27, 2013).
 
 
 
10.6
 
Employment Agreement dated September 3, 2013 by and between Ocera Therapeutics, Inc. and Jeryl Lynn Hilleman (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 5, 2013).
10.7
 
Ocera Therapeutics, Inc. Non-Employee Director Compensation Policy (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on September 5, 2013).
10.8
 
Securities Purchase Agreement, dated as of November 5, 2013, by and among Ocera Therapeutics, Inc. and the Purchasers identified therein (Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on November 7, 2013).
 
 
 
31.1*
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
31.2*
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.1**
 
Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
32.2**
 
Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
 
101.INS+
 
XBRL Instance Document
 
 
 

51




101.SCH+
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL+
 
XBRL Taxonomy  Calculation Linkbase Document
 
 
 
101.LAB+
 
XBRL Taxonomy Label Linkbase Document
 
 
 
101.PRE+
 
XBRL Taxonomy Presentation Linkbase Document
 
 
 
101.DEF+
 
XBRL Taxonomy Definitions Linkbase Document
*Filed herewith
**Furnished herewith
#Portions of these exhibits have been omitted pursuant to a request for confidential treatment submitted to the Securities and Exchange Commission.
 
+ Attached as Exhibits 101 to this report are the following financial statements from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows and (iv) related notes to these financial statements tagged as blocks of text.
 
The XBRL related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall not be deemed “filed” or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended (“Securities Act”) and is not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (“Exchange Act”), or otherwise subject to the liabilities of those sections.


52




SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
OCERA THERAPEUTICS, INC.
(Registrant)
 
Date:
November 14, 2013
By:
/s/ Linda S. Grais, M.D.
 
 
 
Linda S. Grais, M.D.
 
 
 
President and Chief Executive Officer
 
 
 
 
Date:
November 14, 2013
By:
/s/ Jeryl L. Hilleman
 
 
 
Jeryl L. Hilleman
 
 
 
Chief Financial Officer
 
 
 
 
Date:
November 14, 2013
By:
/s/ Rhonda L. Stanley
 
 
 
Rhonda L. Stanley
 
 
 
Principal Accounting Officer


53



EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Linda S. Grais, M.D., certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Ocera Therapeutics, Inc. (the registrant);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
Date:
November 14, 2013
By:
/s/ Linda S. Grais, M.D.
 
 
 
Linda S. Grais, M.D.
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)





EXHIBIT 31.2
 
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
 
I, Jeryl L. Hilleman, certify that:
 
1.
I have reviewed this Quarterly Report on Form 10-Q of Ocera Therapeutics, Inc. (the registrant);

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
(c)
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

 
Date:
November 14, 2013
By:
/s/ Jeryl L. Hilleman
 
 
 
Jeryl L. Hilleman
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)





 





EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Ocera therapeutics, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Linda S. Grais, M.D., President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
  
Date:
November 14, 2013
By:
/s/ Linda S. Grais, M.D.
 
 
 
Linda S. Grais, M.D.
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 







EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
 
In connection with the Quarterly Report of Ocera Therapeutics, Inc. (the “Company”) on Form 10-Q for the quarter ended September 30, 2013, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Jeryl L. Hilleman, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date:
November 14, 2013
By:
/s/ Jeryl L. Hilleman
 
 
 
Jeryl L. Hilleman
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)